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“There is only one social responsibility of business - to use its resources and engage in activities designed to increase profits so long as it stays within the rules of the game, and engage in open and free competition, without deception and fraud.” Milton Friedman (1962) Capitalism and Freedom.
Discuss hot “the rules of the game” have changed in today's global economy for large companies, and what this means for the relevance of CSR as a business strategy.
The last decades a bid debate is going on about the responsibility of business. The most known debate is the one that started with the book of Milton Friedman (1962) Capitalism and Freedom. Then at 1970 Friedman published an article at the New York Times Magazine, repeating his views on corporate responsibilities and he supported them further. After that publication many responses where published from many scholars (ex. Mulligan 1986, Shaw 1988, Nunan 1988) each one arguing for or against Friedman's views. One of the well-promoted debates is the one between Friedman and Freeman who is a major supporter of the stakeholder theory. This last debate ended with the death of Friedman and the essay of Freeman (2008) that he is ending the debate.
The main argument between the scholars is focused in the following phrase of Friedman (1962, 1970): “there is one and only one social responsibility of business-to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”. In this essay I will try to focus on these “rules of the game” in now days, the demands of the global market and some arguments that confirm a change in the “rules” or at least a movement toward a fundamental change.
The New Rules of the Game
In short time after Friedman's publications, Davis (1973) presented a very prophetically article. He tried to illustrate argument for and against social responsibility, presenting very accurate the issues that led to the CSR development and spreading. Among others he spotted the benefits of CSR towards the public image of a company, the long-run self-interest, the implications from government regulation, social norms and the increasing stockholder interest toward responsible behavior. Cooper suggests that Friedman was right, since the “rules of the game” are now changed, and have nothing to do with the “rules” in 1970 that extended only to the basic free market principles. He argues that now the society's expectations of business are including also environmental concern, consumer safety, ethical governance and other. A modern company has to deal with multiple stakeholders that are increasing because of the rising interest and also because of the globalization of the markets. NGOs, trade unions, consumers' organizations, all are trying to influence with the company's activities and support their interests. So now CSR has to go beyond corporate philanthropy and charity work. Row (2006) argues that “now there is greater awareness that CSR encompasses not only what companies do with their profits, but also how they make them”. For better understanding of the changes of the “rules” I will present some of those that had change and what is required, from a company, to deal with now.
Vivien and Thompson (2005) in their essay commented the study of FTSE 100 that found that, in UK, around 60 percent of the firms' market value was not reflected in the balance sheet. That means that the value of a firm is coming also from other non-financial assets. Deephouse (2000) proposed that reputation is the most competitive advantage that companies can have. With the development of the media and the technology, it is crucial for a company to have a good public image. It is now very easy to spread out a problem that occurred in a company, something that in the past was more difficult due lack of means. Now with the internet almost anybody in the world can express an opinion and be read (or heard) by anyone in the world. So a minor problem can easily take global dimension and publicity. Also with the rising number of multinationals millions of people are becoming stakeholders and are interested in the activities of these companies. Fombrun (1996) stated that “reputation is based on stories various stakeholders tell about the organization”. Now with millions of stakeholders, there are millions of stories to be told and the technology provides the means to do it. Fombrun (1998) also lists six criteria that effect reputation of a company in the public eye: financial performance, product quality, employee treatment, community involvement, environmental performance and organizational issues. It is easy to see that many of these criteria are connected with CSR strategies. So CSR can assist a company to create or preserve a good public image, something that in the past was not essential for the business. Rowe (2006) argues that the growing numbers of NGOs, campaigning groups and activist organizations can strongly affect the image of a company. Some years before the numbers of these stakeholders and their power were far smaller. Friedman, driven by the political status of cold war, was facing any critic on the system as a “socialist” or “communistic” approach. Now, in a globalized market, these stakeholders have an important role and influent consumers, shareholders and more or less even nations. People in different countries have different values but the structure of human value system is universal (Schwartz, 1994, 1999). That is why a bad image can affect the stakeholders around the world, even if they have different values. But we should not forget that reputation also affects shareholders' behavior. When having substance, favorable reputation attracts stakeholders as well as shareholders and investors for usually creating refection of investments security and trustworthy treading partner (Dowling, 2004; Gregory, 1991).
Some years ago the balance of power shifted away from government in favor of corporations. Under globalization, deregulation, privatization and technological innovation accelerated that phenomenon (Rowe, 2006). But now, in the post-Enron world and in the middle of a global economic crisis, voices raising and asking for more regulation. Greenfield (2006) argues that “the law governing corporations need to be more protective of corporations”. Lydenberg and Sinclair (2009) argue that “there may be battles between corporations, government and NGOs over the appropriate circumstances for regulation and the degree of that regulation, but the ground rules will have changed only when corporations are seen fighting for, not against, such oversight”. CSR, for now, is a voluntary initiative that corporations are taking “beyond” their legal requirements. Reporting CSR initiatives was part of the communication strategy of each company. Now governments and regulators increasingly expect, and are beginning to require, CSR reporting (Lydenberg and Sinclair, 2009). Governments, especially in Europe, ask from public traded companies to include social and environmental indicators in their reports to shareholders (Lydenberg and Sinclair, 2009). National pension funds are required to adopt social and environmental guidelines for their investments. Also raising economies and markets, such as China, are requiring from the state-owned companies to report their CSR initiatives (Ethical Performance, 2008). We see that, starting from reporting, CSR starts to be regulated. For now reporting of public companies and public interests' investments are required to report and consider social and environmental issues. For sure that will expand to the private sector, maybe through contracting from public companies.
Socially Responsible Investing (SRI) and Morally Responsible Investing (MRI)
Calvert Investments states that SRI funds aim “to integrate personal, social and environmental concerns with financial considerations, their objective is to increase investors' wealth while ensuring that the selected companies have a positive impact on people and the Planet.”. SRI funds are also known as “Green Funds” or “Ethical Funds” (Ghoul and Karam, 2007). Lydenberg and Sinclair (2009) argue that “systematic corporate disclosure on social and environmental issues is increasingly demanded by responsible investors and consumers. SRI Funds are going a step further. SRI Funds demand their investments to be in an ethical way and in ethical sectors of economy. Usually SRI Mutual Funds are not involved with alcohol, gambling, tobacco and weapons production or distribution. Beyond that they pursue to have good performance is areas of welfare, board diversity, community relations, corporate governance, environment, human rights, indigenous peoples right, product safety and impact, and workplace practices (Lydenberg and Sinclair, 2009). Baue and Cook (2008) note there has been a changing behavior of mutual fund voting on climate change issues. Also public pension and investment funds have moved significantly on their transparency with respect to proxy voting (Global proxy Watch, 2008). Moreover in 2006 the United Nations Global Compact and the UN Environment Programme Finance Initiative lunched, at the New York Stock Exchange, the Principles for Responsible Investment, an initiative that aim to connect pension funds and money managers from around the world to commit to principles of responsible investment. As we see there is a turning to the way that investments are done. Beaver (2001) argues that “institutional investors have been taking large and long-term positions in firms while playing more dominant role in corporate affairs”. Also Warren (2002) notes that “over 60% of shares are held by financial institutions, which seek the best returns on behalf of their investors […] however, there is now a growing sector of the investment market that is guided by ethical criteria in the selection of its investment portfolio”. At last Hendry et al. (2007) argue that “the activism of public pension funds, and more recently of trade unions pension funds, has had greater effect on company-shareholder relationship. [..] Public pension funds, have taken the view that the pensioners of the future have an interest not only in financial returns but also in such things as environmental sustainability and ethically and socially responsible capitalism.”.
A different kind of responsible investment is the so-called Morally Responsible Investing (MRI). These are faith-based funds that invest in companies whose products and policies are consistent with the investor's religious (usually moral) beliefs (Ghoul and Karam, 2007). There are basically two types of MRI funds, the Islamic Mutual Funds and the Christian Funds. Both are based on the religion and their investment is more focused on ethical (each in its own perception) field of investing and less on social or environmental contribution (Ghoul and Karam, 2007). That is the major difference with the “common” SRI funds.
When Milton Friedman was writing his famous book and essay couldn't predict these changes in the world. He was actually right when he argued that companies should act within “rules of the game”. Those rules have change. Cooper supports that companies of the 21st century have as an essential component of success a balanced approach of CSR issues. As we saw many of the rules are changed and keep changing. The image of a company is now more important than ever before. CSR makes the corporate image better. Also the way of investing had changed. Personal values of the investors or sustainability strategies of Mutual Funds are affecting the investor's portfolio towards ethical and responsible investing. Regulatory systems are changing and moving towards more ethical accountability. The corporate scandals and the financial crisis triggered a reaction of multiple stakeholders that now demand a more regulatory system. Companies also start to support that, since they see that the bad actions of some targeted whole industries (ex. Bonuses of bankers). Risk and sustainability strategies are becoming a mainstream in the business world. Those can't work if they are not connected with CSR strategies and responsible behaviors. Klein and Dawar (2004) propose that CSR has value to the firm as a form of insurance policy against negative events. There is still to see if these rules are going to change more and how are they going to interact with the market and companies behavior. Googins et al. (2007) argue that the rules of the game “are to change, however this redefinition will need to encompass shifts that are legal, regulatory, theoretical and cultural”.