The Responsibility Of Business Commerce Essay

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It can undoubtedly be said that profit maximization has been the primary aim of any business in the corporate sector. Fulfilling its economic duty, that is, making and maximizing profits will be the priority of any business in operation. This is mainly because shareholders have invested their money in the business and they would want to have a return on their investment, which will be in the form of the profits made. In a famous article for The New York Times Magazine, Friedman, American Economist, even stated that "the only responsibility of business is to increase its profits."

But on that basis can we say that profit maximization, which ruled the traditional business' mindset over years, is the sole responsibility of the corporate sector?

It will be true to say that profits act as necessity for any business to survive, but this does not necessarily mean that firms should look forward to profit maximization only. It is similar to the fact that, food does prove to be necessary for human to survive, but this does not mean that the sole purpose of life is to eat! The fundamental doctrines of business, such as that proposed by Adam Smith and Milton Friedman, based on the belief that the private search for profit indeed advances the public interest, have endlessly been interpreted and debated. This is because a business does not only comprise of only shareholders who invested their money in fact, but it also consists of different groups of people. As a result of which, the relationship between an organization and its different stakeholders should be analyzed in order to deduce whether the responsibility of business is only to maximize profits or does it go beyond profit maximization?

What are stakeholders? Stakeholders are groups of people who have an interest, direct or indirect, financial or otherwise, in the performance of a business. They will be any individual, group or organization that is affected by the activities of the business, and will include the shareholders, employees, unions, consumers, suppliers, local communities, public and special interest groups, the government and so forth. [2] All these groups of people have a direct or indirect interest in the running of a business and the business will therefore owe responsibilities towards each of them. There have been two major interpretations of the importance of these different groups of people in the operations of a business, namely the stockholder model and the stakeholder model.

The traditional stockholder model v/s the new stakeholder model

A stockholder is the provider of capital, the owner, and the profiteer of a corporation. Their role is that of financial investor, that is, they lend their current capital with expectations of the return of greater capital in the future. While a stakeholder, as seen, is anyone who has a vested interest in the performance of the company, and will include everyone involved in the successful running of the corporation.

The aims and objectives of the stakeholders are often not the same as stockholders and they come into conflict. And this is where that the stockholder model and stakeholder model will take the form of a contrast in business management theories and business ethics theories as explained below:

The stockholder model is one which assumes that the concern of a business is to serve the best interest of the owners. As a result, the business will have the responsibility of principally maximizing profits for the holders of stock, that is, the owners of the business - the shareholders. Management will be having the one responsibility of maximizing profits in order to satisfy and reward the stockholders.

Over the years, the stockholder model has been the norm. Companies have predominantly been seen as the property of its owners. Consequently, corporations have functioned as instruments of creating economic value only for those who risk capital in the enterprise.

Friedman, proponent of the stockholder theory, stated:

"There is one and only one social responsibility of business - to use its 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."

This statement seemed to be right until the other side of the coin was explored.

Many management theorists have claimed that while profits may be an essential pursuit of the company, they may also be seen as a means rather than an end. Henry Ford, American Industrialist and founder of the Ford Motor Company, has been quoted saying that:

"A business that makes nothing but money is a poor kind of business." [3] 

That is why debate has emerged regarding a shift of focus in the organization's perceptions. [4] The purpose of the organization has in fact been perceived in a much wider context with the stakeholder model. The latter states that corporate management has obligations not only towards stockholders, but to every other group that can stake a claim to the performance of the business. As a result, its responsibility does not comprise of only profit maximization, but it goes beyond that. As a management theory, the stakeholder theory held that a business is most successfully run when it considers the well-being of every stakeholder. As an ethical theory, it rests on the moral sentiment that all people should be treated as ends, not as means to profit, and the business therefore, also has to act in a morally responsible way. Let us see how each stakeholder is affected by the performance of the business whereby the responsibility of the business will not solely be to maximize profits but will go beyond that:

A business has responsibilities towards each and every stakeholder

Shareholders

First and foremost, we have the shareholders, who are also known as the stockholders. These people have a clear financial interest in the performance of the business since they have invested money into the company through purchasing shares and they expect the company to grow and prosper so that they receive a healthy return on their investment. They will be interested in their dividends and capital growth of their shares. As a result, according to them, the only responsibility of the business will be to operate in the best financial interests and to maximize profits. The social responsibility of the business to the shareholders will therefore be the best return on investment, and that is why most businesses have been operating in their own self-interest. But does this mean that the only responsibility of businesses is profit maximization? The answer to this is simply no, because a fact remains that the business has to consider its broader social, moral duties towards all its various stakeholders, and it therefore has to fulfill its obligations towards all of them. The goals and objectives of the various stakeholders vary, but all of them must be considered as explained in the following:

Employees

This group also has an obvious financial interest in the company, since their pay levels and their job security will depend on the performance and the profitability of the business. It is employees who perform the basic functions and tasks of the business (producing output, meeting deadlines, delivery dates and so forth). Over recent years their traditional role has been immensely evolving, and consequently they have been having a significant input to the workings of the business. As a result, they will not only expect that the business makes profits, but they will also expect that they receive a fair pay, their work is fairly and accordingly remunerated in the organization. They will also expect that the business provides them with good work conditions and ensure them job security. We thus see that maximizing profits will not be the only responsibility of a business: it will also have to ensure that it is fulfilling its broader duties of fairly remunerating its employees and providing them with good working conditions. It will also have the social and moral responsibility of ensuring that its employees and staff are fairly being treated in the organization; no exploitation, no discrimination, no harassment, not too much pressure on staff, no unjust treatment amongst others. The ethical part of treatment towards the employees will also have to be considered.

Customers

Similarly, customers are vital to the survival of any business, since they purchase the goods and services which provide the business with the majority of its revenue. They will expect the business to offer a fair and reasonable price for their products and will also expect the business to offer safe products. The business has also got the responsibility of providing quality products; there should be quality assurance as well as customer satisfaction. It is therefore quite imperative for a business to find out exactly what the needs of the consumers are, and to produce their output to directly satisfy these needs so that the customer is happy with his/her purchase. We therefore deduce that, as far as the customers of a business is concerned, the responsibility of a business indeed does not limit itself to profit maximization but it goes beyond than this. The customers will not seek for maximization of profits, but will seek for fair pricing and customer satisfaction which the business will have to ensure.

Suppliers and creditors

Without flexible and reliable suppliers, the business cannot guarantee that it will always have sufficient high quality raw materials which they require to produce their output. It is therefore important for a business to maintain good relationships with their suppliers, so that raw materials and components can be ordered and delivered at short notice, and also so that the business can negotiate good credit terms from the suppliers (i.e. buy now, pay at a later date). Similarly, the business has got the responsibility of making prompt payments to its suppliers and creditors and to assure its suppliers that it will be conducting regular business with them. This therefore implies that the business does not only have the responsibility of maximizing profits, but it should also ensure that its suppliers are also attended to.

The Government

The government is one stakeholder which affects the workings of businesses in many ways. One of the very first ways is the payment of taxation to the government. The business has got the responsibility of paying corporation tax on their profits, value added tax on their sales for example. Secondly, businesses also have to adhere to a wide-ranging amount of legislation, which is aimed at protecting the consumers, the employees and the local environment from business activity. They should not only be aiming at maximizing profits but they should also be looking at the social duties which they should be following in respect to the legislation prescribed. Businesses will also be affected by the different economic policies being adopted by the government in the country, and the government will be expecting that the businesses function in line with these policies instead of looking only at maximizing profits. This is because if businesses look at only profit maximization during difficult times like recession, this might cause a detrimental effect on another stakeholder, customers for example, and in this case the responsibility of businesses will have to go beyond profit maximization, not seeking only to maximize profits but also looking at its broader social duties.

The Local Community

The local community is another very important stakeholder which is affected by the operations of a business. The spirit of corporate citizenship suggests that a company in fact derives profit from the community and therefore it has an obligation to contribute to its development. Often businesses are expected to provide significant employment for the local community and they will produce and sell much of their output to the local residents. Socially responsible projects, more commonly known as Corporate Social Responsibility, like the sponsorship of local events and good causes (such as local charity work) are also expected to be carried out by the business, whereby they can even establish themselves in the community as caring, socially responsible organizations. Businesses have also got the responsibility of contributing towards the broader society by for example, developing links with schools and colleges, offering sponsorships and resources to these under-funded institutions. In addition, businesses are also expected to minimize problems like congestion, pollution, noise and other such negative externalities in the local communities and for the betterment of society.

From these, we clearly see that the responsibility of business goes beyond profit maximization whereby businesses are expected to be ethical and to fulfill social obligations towards the larger society and towards all its various stakeholders. This statement can be summarized in the following diagram which clearly illustrates that businesses do not only have the responsibility of maximizing profits, but they have also got to fulfill other legal, social and ethical responsibilities towards all its stakeholders:

Hence as seen, the responsibilities of businesses will go beyond profit maximization since shareholders are not the only stakeholders of the business, but there are also several stakeholders. All these responsibilities will in fact be categorized into legal, social and ethical responsibilities in business as explained as on the following page:

Legal, social and ethical responsibilities in businesses

Apart from profit maximization, the other responsibilities of businesses can in fact be classified into the following:

Legal responsibility

>All companies are subject to legal responsibilities and are required to follow the law.

>In order to operate soundly, a company must familiarize itself with external factors that govern the industry that the company operates.

Social responsibility

>In order to thrive in the public's eye, a company must meet certain social responsibility requirements.

>Thus in the planning stages, it must consider where it can provide value beyond its products and services. For example, a company's social responsibilities.

Ethical responsibility

>In the planning process, organizations must think about setting guidelines in order to govern their business's practices and to protect the company, its employees and shareholders; this is usually done by establishing ethical codes of conduct.

>The Caux ethics is a system of principles designed to help organizations establish ground rules for ethical practice. The first principle in fact goes on stating that:

"Businesses have a role to play in improving the lives of all their customers, employees, and shareholders by sharing with them the wealth they have created" [5] 

A must to be ethically and socially responsible!

There are many reasons as to why should businesses be ethical and socially responsible in today's world. For example ethical issues between employees and management can have serious effects on a company. Unethical employment practices such as discrimination (by creed, age, sex etc), harassment and poor standards of health and safety can severely damage an organization's image.

Poor employment relations can lead to loss of reputation, low productivity, poor morale amongst staff and heavy financial costs from courts and compensation pay-outs for example. Furthermore firms which seek to exploit cheap labor in underdeveloped countries run the risk of turning away both their customers and governments in their home countries. For example, companies like Nike have used 'cheap' and sometimes child labor to manufacture their products in countries such as China and India. This has proved to be extremely profitable to the company but ethically speaking they have immensely been questioned.

Similarly it was seen that many firms have denied the responsibility of ensuring quality products as a result of which the businesses had to pay the price for customer satisfaction. Afterwards, due to increasing customer pressures, the firms unwillingly had to resort to compensation strategy for defective offerings. The economic cost of such a practice was even found to be unreasonable. It was only then that the businesses realized the importance of quality assurance. In order to avoid such ill effects, the business has therefore got to be ethical and socially responsible.

An ethical and socially responsible organization should in addition recognize that a safe working environment and pleasant conditions has a motivational effect on staff and thus increase their loyalty and commitment towards the firm in general. An example of such an ethical firm is the car manufacture Daimler-Chrysler Company, which has implemented an ''employment pact''. This 'employment pact' has proved to increase a sense of importance, self worth and security amongst the company's workers and therefore demonstrating the importance which the company places in ethical responsibility towards its employees.

Conclusion

Despite the fact that it has proven to be imperative for firms to be ethical and socially responsible towards its various stakeholders, many still believe in profit maximization as the paramount goal of their existence. Recent surveys conducted indicate that businesses still go by the dictum that the only social responsibility of a business is to increase its profits. There are however cases of truly virtuous businesses, which have come to realize that an ethical and socially responsible behavior is related to sustainable economic value creation, and is in fact imperative to sustainable competitive advantage. And nowadays, it is increasingly evident that corporate environmental and social responsibility is now on the agenda of business leaders as well as other opinion leaders in society. Whether in the Harvard Business Review or at Davos, world leaders are concerned about these issues and are convinced that corporations and their leaders have the capacity and resources to contribute importantly to a more just and ethical society. Increasing evidence is emerging that environmental and social responsibility makes good business sense. Businesses with good social and environmental records perform better in the long run than those that do not behave responsibly. Beyond the bottom line, businesses need to balance economic, legal, and social responsibilities towards all its stakeholders.

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