Corporations Obligations Toward Stakeholders Commerce Essay

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Recent years, the concept of corporate social responsibility has suddenly become a fundamental aspect of the modern corporation, after being declined and argued by business leaders for many years: "Corporate social responsibility has changed from an unrelated and often frowned-upon idea to one of the standard and broadly acknowledged idea in the business world throughout the last thirty years or so" (Lee, 2008). The focus on Corporate Social Responsibility in Malaysia has improved in parallel with global movement. Even though some companies have their Corporate Social Responsibility activities which date back many years, even decades, it is in recent years that the degree of CSR-awareness and activity has really active in Malaysia. Actually Corporate Social Responsibility is said to be the practice of the companies in returning back the benefits to the society in the activities forms that benefits the less fortunate members of society.

The social and environment awareness about business had already existed as long as the time of trade and business was first found. Business logging activities for instance, together with laws to preserve jungle, can both be found back in almost 5,000 years ago. In around 1700 BC during the Ancient Mesopotamia, King Hammurabi at that time came out with a rule in which if the builders, innkeepers or farmers were found carelessness and had caused the deaths of others, or major inconvenience to local citizens, they will be put to death. In Ancient Rome senators complain about the failure of businesses to supply adequate taxes to finance their military operation while in 1622s disgruntled shareholders in the Dutch East India Company started giving out leaflets to complain about management confidentiality and "self enrichment". It is said to be an entirely new dimension due to the effect of business on environment and society during the industrialization. The "corporate paternalists" used some of their wealth to support philanthropic ventures during the late nineteenth and early twentieth century's.

By the 1920s discussions about the social responsibilities of business had improved into what we can identify as the starting of the "modern" CSR movement. Almost 75 years later, these words ring just as true. Although today we face some novel concern about the role of business in society, from internet "spam" to genetically modified foods, many of the issues under discussion are not very different to those being raised in the 1920s.

When we talk about the implementation of corporate social responsibility, there is an continuing argument that whether a company should exist fully to make profits for its shareholders or whether it should give more concentration to the environment and social concern that is related to the practice of Corporate Social Responsibility. Each stakeholder has its own relationship to the company, and managers must react consequently base on what are their concerns, and what do they desire from the relationship with the company (Jensen, 2002; Smith, 2003; Freeman, Wicks, & Parmar, 2004; Lee, 2008; Schaefer, 2008).

Proponents View

The proponents of this view may refer to the employees and shareholders. Employees, in exchange for their hardship and precious time, will hope to obtain a fair return and an occasion for professional improvement. Shareholders, in exchange for their investment, they will expect to obtain dividends and, over time their capital increase in value. Shareholders are most attracted in having all the ownership benefits of the company because the economic health of the company will influence these shareholders financially which some are their personal wealth and some are their retirement security. For the purpose of this study, among the proponents view, we only focus on the shareholders. Based on the proponents' view, a firm should exist fully for making profit. They were arguing about the market being the final arbiter of distributing resources and point to the market as the place where motivation for allocating resources for social and environment causes is to be seen.

Under the legitimate theory, companies are said to be having more obligations toward its shareholder which saying that companies have implicit contract with shareholders to provide for their long-term needs and wants. By providing for the desires of shareholders, the companies legitimate its existence (Guthrie & Parker, 1989). Since shareholders are the only ownership holders of the company, the company should be functioned to maximize their shareholders interest. The acts of implementing the unprofitable CSR programs of the company are actually denying their fiduciary responsibility and their obligation to their shareholders. In the real situation, the society has numerous problems that accumulated for many years such as scarcity and pollution, it would cost more than a company could have afford to solve these problems. Instead, many business leaders have found out that the pursuit of the corporate social responsibility practice often ends ups to a drop in profits. In fact, many managers who had pursued CSR activities that hampered their companies' profits had being viewed as did not fulfill the obligation of the companies to maximize profits of their shareholder and will likely be fired by the shareholders. The owners of a firm desire a return on their investment, and would likely to sack a manager that intentionally against this objective. The practice of maximize the shareholders interest is often being found in many big companies which have decided to have their production in the rural countries area. In order to further reduce their cost of manufacturing the business manager will tend to select the suppliers who provided the lowest price without knowing whether their suppliers are having labor abuse. Many famous manufacturers like Nike, Addidas, and Apple are found having their production in Vietnam, Cambodia and India.

Besides that, there are also philosophers who saying 'because social action will have a price for the firm it also entails a competitive disadvantage' (Smith, 2002). Therefore, proponents of this view suppose that all the social actions should not be beginning by businesses. As by having CSR activities, companies will have lower revenues and since each company will have different degree of spending on CSR, it will then create an unequal cost between competitors in market which ultimately result a competitive disadvantage between competitors. The weak point of this argument is that usually social actions may actually end up promote the companies reputations and raise up public support of a corporation because CSR is said to be a tradeoff of the long term benefit of the companies with the short term benefit of the companies. While the shareholders normally only demand for short term benefit rather than long term benefit, in other words that they don't even care about long term benefit of the companies if they are given with short term benefits. However, the benefits of profitable CSR initiatives must be equal with the fact that unprofitable CSR project may put a firm at a competitive disadvantage. The ethical Utilitarianism action of Walmart executive served as a prominent example. In the year 2005, the Radio Canada program Zone Libre reported that Walmart was using child labor in Bangladesh. Children aged 10-14 years old were found to be working in the factories for less than $50 a month making product of the Walmart brand for export to Canada. During that time, Walmart reputation was being damaged and the sales dropped vigorously. On the time of discovery, Walmart started to develop its Code of Conduct "standard for Suppliers" setting the age of 14 as the minimum age for suppliers and subcontractors to hire workers. (Walmart, supra note95, p. 29).

In my opinion, all companies have primary obligation toward its shareholder, as CSR activities carried out by the companies is more like a long term tradeoff between short term benefit and long term benefit of the companies. A business ultimate purpose is to make profit but not for charity purpose, although company has obligation to the rest of the society but only to the extent where it does not affect the companies' long-term shareholders' interest. For example, a company with a store operating in one rural area becomes unprofitable; I would agree that the firm to consider closing the store to avoid harming the shareholders although CSR practice may recommend that the company to remain the store operate to continue to offer for the society, this is because leaving the store open does not maximize long-term shareholders' wealth. If the obligations to the rest of the society come before shareholders, does it means that all of the companies will have to close down their factories to prevent any pollutions from happening as it is impossible for the process of manufacturing without affecting the society member and the environment. For all the companies to continue operate, they have placed their primary obligation on their shareholders, though the companies still have obligation toward the society and carry out CSR activities, but the obligation is lower when comparing to the obligation toward the shareholders.

Consider on the case of Coca-Cola in year 2003, which product being found containing pesticides to a level that exceeding European standards in a sample of a dozen Coca-Cola beverages sold in India and the extracted activities of large amount of groundwater has polluted the water sources of the country. The reputation of Coca-Cola was being damaged due to the pesticide issues which affected the shareholders' interest. To this Coca-Cola had launched various community water projects in India and even published its environmental performance report on operations in India, which covered activities from 2004 to 2007. The CSR activities done by Coca-Cola has built up their reputation in India which in the same way increase the long-term benefits of its shareholders. The act of over extracted groundwater without concerning on the water sources pollution already showed that Coca-Cola placed it primary obligation on their shareholders and tried to gain more profit on the groundwater extraction.

Opponent of the view

On the other side, the opponents of this view take the stand that everything cannot be left to the market and there needs to be a mechanism in place where by the environmental and social causes need to be taken care of. The opponent of this view may include customers, and local communities. Customers likewise, aim to gain quality and fair value in exchange for the purchase price of goods and services. Besides that, local communities, public interest group and government have another kind of connection with the company. In general their stake is broader than financial stake of owners, customers, and suppliers. They may wish to protect the environment, assure human rights, or advance other broad social interests. Managers need to understand this complex, often intersecting stakeholder interest. Due to the purpose of the study, the whole societies are all to be in the opponents of this view.

The opponent of this view argued that the corporation is obligated to promote society's interest in return because society provides important resources to the company. In a result, the statement saying that because companies have the resources, they should involve in corporate social responsibility project. Besides that

Furthermore when the Corporate Social Responsibility is related to ethical theory, the company are also said to have more obligations to the rest of the society. There are generally Stewardship principle and Charity principle, both are said to be focus more on the broader view of the stakeholders and the society. In between these two principle, some business leader are said to be acquiring the ethical theory of Utilitarianism to have follow the Bible derived Stewardship principle which required business and wealthy individuals to treat themselves as stewards, or trustees, who act in the purpose of the general public's interest. Even though they know their companies are privately owned and their ultimate objective is to maximize the profit of their companies, business leader with utilitarianism to follow the stewardship principle believe they have an obligation to see everyone especially those who are in need, benefit from their companies' actions. Through stewardship principle, the business leaders will acquire a duty to use the resources of the companies in ways that are good not only for the shareholders but for the society as a whole. As such, they are expected to act with a certain degree of social responsibility in making business decisions. Stewardship responsibility can be illustrated by Intel India which gathered Intel volunteers to bring the outside world to them through providing extra education for them and show them how to use computers since year 2002. After years of effort, the project has given a huge impact to the children which have changed the lives of these children in India. Through the CSR program, Intel intend to help the societies in four key parts which are technology inclusion, education, environment stewardship and safety, and community development.

On the other side, some business leader are said to acquire ethical justice to follow the Charity principle. Different from stewardship principle, charity principle's idea required that the wealthier members of society should be generous toward those less fortunate people, which is considered as a very ancient notion. Of course under charity principle it is fully depend on the wealthy people themselves to decide how much to contribute.

There are many examples of the applications of these principles today. The charity principle could be seen after the Hurricane Sandy storm when many corporations donate for Sandy storm relief. A number of major media companies, including the owners of ABC News and Fox News Channel, are making sizable donation to charities to help the sufferers of Hurricane Sandy. News Corp donated $ 1million to charity, half of it help in New York City, and half for New Jersey. The Walt Disney Company is donating 2million dollar to relief effort. "It is hard to fathom the devastation from this storm," said Disney CEO Bob Iger in a statement. (ABC, Fox News, Weather, By Alex Weprin on November 1, 2012 2:59 PM). The principle mainly targeted on the less fortunate members of the society, the activities organized under the Charity principle even include sheltering women and children, counseling troubled families and helping children who are victims of aiding alcoholics, physical abuse, treating the mentally ill or taking care of the destitute or the physically handicapped. When business companies reached out to help others in these ways, they were obtaining some degree of responsibility for improving the form of life in their societies. By doing so, their actions helped to fight back the opponents who claimed that business leader were heartless and focus only in profit

Besides that, there are also companies' managers, who believe that their companies to acquire a competitive advantage thus leading to greater market share , if they acquire CSR practices. Companies will be able to gain their reputation as their competitive advantages by helps to attract and retain better employees to stimulate productivity and promoting repeat purchases by loyal customers and improve prosperity of the companies which is said to be the intangible asset of the companies. A company with corporate social responsibility practice will be able to distinguish itself from its competitors by engendering employee and consumer goodwill (McWilliams & Siegel, 2001). It is reasonable to think that one company will basically attract the majority customers in the market if it concerning its customers; safety, health and well-being

Similarly, among the companies in the market, skilled employees with most offers may feel like to work for companies that takes good care of its employees, or contributes to the social good of the community, or is more sensitive to the safety and needs of its customers which in other words make their employees proud to be in the companies. Therefore a company may gains from being socially responsible by improving the quality of those they attract to the company. CSR can also be used to prevent the gaining advantages of competitors. When one company in the industry field has applied CSR policies, to be competitive enough, rival firms may also be forced to get involve in CSR as well. If they don't, they will said to be in a high possibility of danger of losing consumer loyalty. On the other hand, some firms are involved in CSR simply because they believe it is the right things to do. Regardless of the underlying reason, CSRs has become a commonly used term in the business competition (Lindagreen, Swaen & Maon, 2009).


As this study discuss which obligation of the company come before, though the CSR practice in companies is getting important and is really benefits to the companies whether in promoting long term profits for business or correct social problems caused by the companies, but when come to which obligation the companies owe more, I would say the companies' obligations toward shareholders come before the society.

After went through some articles and some real life news, it is found that one company will generally increase its CSR activities only when its reputation is damaged in the market due to all kinds of bad news though there are some exception. This proved that many companies now are actually follow the statement of the corporate obligations to their shareholders come before its obligations to the rest of the society. Though companies do not abandon CSR but they treat it as a long term tradeoff between short term benefits and long term benefit of its shareholders, this means that they will kind of expecting to gain something either their reputation or their loyalty from customers and employees in long term when they conduct CSR activities.

Companies should not purposely harm the stakeholders and society member to make a profit, it should maximize shareholders' long term interest, but not at the cost of the stakeholders and ethical guidelines. Although the companies have their primary obligation toward its shareholders, it does not mean that they do not have any obligation toward the society. As firm cannot survive in the long term if they have poor relations with their other stakeholders and society.

At the same time, firms cannot meet all the desires of their stakeholders and remain profitable but only to the extent that does not affect its shareholders long term benefits. Shareholder, as individuals may generously donate their money to help in improving the society. However, using the wealth that shareholders have invested in a company to support unprofitable causes is obviously wrongful. Therefore, business should make a profit, obey the law and only pursue CSR activities that will improve long-term shareholders' interest.