Building Sustainable value through fiscal and social responsibility


Pratima Bansal has the view that a business can maximize profits and be ethical at the same time. She believes that companies should look for these overlapping boundaries, where the interest of stakeholders and the company align, as it benefits the company over the long run.

While economic theory shows us that corporations are extremely effective in allocating resources, she argues that this theory doesn't apply in reality, because markets are never perfectly competitive. Fiscal policies do not account for market failure and negative externalities; and thus, it would be fallacious for a business to rely on economic theory alone.

She also makes two ethical arguments on why companies are morally obliged to give back to their community. Her first argument states that businesses use the tools of society, such as water, land and air to generate a profit; hence, they have to pay for this. Her second argument revolves around the fact that companies produce negative externalities; hence, they need to reimburse society by being socially responsible.

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She also claims that businesses are extremely influential today, and with this great power, comes great responsibility. Hence, she believes that businesses have more obligation than individuals in giving back to society, simply because it is in a better position to do so.

However, she also admits that an ethical argument by itself is not practical in many aspects. Firstly, who is to decide what is more ethical than another? It is almost impossible to evaluate or measure the success of an ethical decision. Secondly, it is also hard to find a consensus when so many stakeholders are involved. Is there only success when all stakeholders are pacified? Thirdly, many types of ethical activities are beyond the law and done out of goodwill. These ethical activities are very volatile as companies have no obligations to commit to it during stressful times. Finally, the business of a corporation is to generate returns for their shareholder; hence, one may argue that it is unethical to divert funds towards anything that doesn't maximize profits.

By looking for the overlapping gap between profits and social responsibility, businesses are actually benefiting themselves in the long term. This is because, merging ethical and economic standards can help the companies create sustainable value. This is especially vital today, as technology has given stakeholders more leverage than they ever had before. Hence, creating sustainable value is the best risk management strategy that a company can use in the long run.

Sadly, most companies do not view social responsibility in such as manner. The focus of many companies is to please their shareholders, and this drives managers to look for short term gain, rather than sustainability. This is because managers are punished with the risk of losing their jobs if there are no gains. Similarly, managers are often rewarded for generating returns in the short term.

Pratima Bansal states that in order to find the "overlapping gap", companies need to include social processes. This means involving all the stakeholders during important decision-making process. Such a process can help to identify social issues from the start and remove options that are not sustainable in the long run. Furthermore, this process will ensure uniformity throughout the company's decision; not just at the top or the bottom.

A social process is not just useful for making complicated decisions that involve many stakeholders. It is also an excellent tool for many companies in identifying new opportunities. While the short term costs are high, the payoffs in the long run make it worth the time.

Many firms are also actively encouraging their employees to volunteer in their local community. This helps to increase their awareness of social issues and places the company in a better position to understand their problems. Having employees in the field also shows that the company is serious about engagement. Furthermore, it helps employee create Invaluable social networks with stakeholders, many of whom are important help to generate solutions and opportunities from social issues.

As the largest stakeholder in a firm, employees should also be involved in strategic decision making processes to encourage internal debate. As they are involved in the daily operations of the company, they are in a good position indentify social issues. One way to involve employees is to use cross-functional teams. Cross functional teams may not be efficient and are not often used for making decisions; however, they are extremely crucial in vetting strategic decisions as they can highlight many issues which are often overlooked. They can also offer many innovative solutions that stems from the diversity of the expertise.

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Cross functional teams are also excellent for breaking down barriers between departments in a company. This helps to improve knowledge transfer within a company and restrict corporate values from being diluted by outside perspectives.

In conclusion, companies should focus on building long term sustainability by focusing on activities which are both profitable and socially responsible. Many companies are already aware of this, and only by doing so, can they move forward and stand out from their competitors.

Arguments for the article

2. Bansal argues that economic theory is not perfect. Hence, operating a business without considering other stakeholders and social responsibility will be detrimental to the company in the long term. Hence, the business model should focus on areas which are both profitable and socially responsible.

Arguments Against the article

2. Bansal argues that economic theory is not perfect. Hence, operating a business without considering other stakeholders and social responsibility will be detrimental to the company in the long term. Hence, the business model should focus on areas which are both profitable and socially responsible.

I disagree that social responsibility is needed to make up for economic imperfection. A business can be profitable in the long term without being socially responsible.

Milton Friedman once said "The business of business is business." He argues that the businesses are only accountable towards their shareholder because that is the reason for the formation of a corporation. He further argues that "business" can't have responsibilities, only people can be responsible. This is true as decisions to engage in socially responsible campaigns are set by people in the company, most of the time by people at the top. These decisions can't be made by a corporation, even if it was a collective decision by everyone in the firm. A corporation is simply a legal entity which has no conscious or desire to do good; and corporate executives are appointed by shareholders who want returns on their investments. Hence, this brings in the question of whether it is right for people or managers in the company to use resources for purposes other than profit maximization. In a sense, by engaging in activities that are not for profit will mean that the executives are not being socially responsible to their shareholders.

Principles aside, is social responsibility really the answer to sustainable value? This depends on how broad the definition of social responsibility is.

If social responsibility revolves around an obligation to benefit the largest number of stakeholders, then it can reasonably be said to create sustainable value in the long term. Companies such as Starbucks use this business model to keep their stakeholders happy and loyal. Their employees often contribute by helping out in disaster stricken areas, as seen during the aftermath of 9/11 and Hurricane Katrina. The company also makes an effort to give all coffee farmers a fair price for their products. By being socially responsible to their stakeholders, Starbucks has become the number one coffee chain in the world today.

On the other hand, if a company uses the guise of contributing to their stakeholders in a bid to generate more profits, is this truly social responsibility? Many companies produce beautiful reports of their corporate social responsibility (CSR) campaign along with their annual report to showcase their contributions to the world. There are many benefits in doing so. Firstly, many investors are becoming increasingly concern with a company's CSR because they want to do their part in being socially responsible. Job seekers are also becoming increasingly particular about the companies they work for, and social responsibility is one detail they look for. By showcasing their CSR report to the world, these companies can also divert attacks on their company for being irresponsible.

If these CSR campaigns are done to achieve these benefits, then the agenda of profit making still remains the same, and social responsibility is simply a tool for achieving that. Furthermore, Bansal also brings up the issue that what is ethical can't be measured. As a result, how can we tell if a company has done enough? Going back to the example on Starbucks, the company has been accused of underpaying their employees and deceitfully using health benefits to back up their claims. How do we balance that against the good that Starbucks have done for its stakeholders? More often than not, companies do just enough to create the perception that they care. In such cases, there is no "overlapping" area as quoted by Bansal. Social responsibility is simply a subset of Profit maximization; and thus, profits driven motives are ultimately what creates short term value.

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That is not to say that a business should not look for areas which they can be profitable and do good at the same time. What it simply means is that a company does not have to be socially responsible to have sustainable value in the long run; it just has to appear that way. However, this brings us to another debatable point of whether an "overlapping area" always exists.

1. On building sustainable value, Bansal argues that ethics and economics will converge over time, and eventually, unethical firms will lose their social license to operate. She states that in order to survive, companies need to find the middle ground where they can build long term stable profits and on good terms with the various stakeholders.

There are two arguments against this. Firstly, we will analyze whether unethical firms will really lose their social licenses to operate, and even if they do, will it be too late. Secondly, we will see if it is always possible for a business to find a middle ground where profits and ethics meet.

There is no doubt that large companies needs to be show that they are being socially responsible today, otherwise, they would be labeled and scrutinized by their various stakeholders. However, does it mean that these companies will lose their license to ope