Social Responsibility - Principles of Management

In addition to recognizing stakeholders and their claims, acting legally, and behaving ethically, many believe that businesses should also act in a socially responsible manner. For a business firm, social responsibility is a sense of obligation on the part of managers to build certain social criteria into their decision making. The concept implies that when managers within a business evaluate decisions, there should be a presumption in favor of adopting courses ofaction that enhance the welfare of society at large. The goals selected are often quite specific: to enhance the welfare of communities in which a business is based, improve the environment, or raise the education level of employees.

ARGUMENTS FOR SOCIAL RESPONSIBILITY

In its purest form, social responsibility can be supported for its own sake simply because it is the right way for a business to behave. Advocates of this approach assert that businesses, and particularly large successful businesses, need to give something back to the society that has made their success possible. More pragmatic are arguments that socially responsible behavior is in a firm’s self-interest and can lead to better financial performance.

Economic actions have social consequences affecting a company’s outside stakeholders. Therefore, to retain the support of these stakeholders, the company must take those social consequences into account when formulating strategies. Otherwise it may generate ill will and opposition. For example, if a community perceives a company as having an adverse impact on the local environment, it may block the company’s attempts to build new facilities in the area.

The pragmatic approach, you might realize, is an extension of the stakeholder management approach that we discussed earlier in the chapter. In contrast, the purer approach emphasizing the social responsibility of successful businesses goes beyond a pragmatic stakeholder management approach to advocate that businesses should take actions to enhance the welfare of society that exceed what is necessary to maintain the support of key external stakeholders.

For example, a business with a strong sense of social responsibility may invest in the community where it is located beyond the level necessary to maintain community support.

BP, one of the world’s largest oil companies, is a good example of a business that has taken the notion of social responsibility to heart in recent years. 34 BP was the first oil company toaccept that greenhouse gas emissions may be changing the world’s climate in unpredictable and potentially harmful ways. BP embraced a goal of doing no harm to the environment—a difficult goal for an oil company because its products are a primary source of greenhouse gas emissions.

Since the late 1990s BP has invested in the development of technologies designed to reduce emissions of greenhouse gases from oil-burning electric plants and from automobiles.In 1998 BP set a target of reducing the greenhouse gas emissions from its own operations by 10 percent from a 1990 baseline level by 2010. The company actually met this target in 2001, nine years ahead of schedule. Moreover, savings associated with greater fuel efficiency and reductions in the amount of gas flared or vented from its facilities achieved this reduction without raising costs.

BP has also embraced its responsibility to the communities in which it does business and has invested in trying to improve the quality of life in those communities. In Algeria, for example, where BP is the largest foreign oil enterprise, the company has a social investment program that, among other things, has invested in facilities to improve the quality of the local water supply.

In the desert community of In Salah, where groundwater supplies of drinking water were contaminated with salt, BP has built four desalination plants so that all of the town’s 27,000 inhabitants can have access to 20 liters of pure water a day for drinking andcooking. Nor is this an isolated case; wherever BP does business, the company has established social investment programs both because the company believes that this is the right thing to do and because it is in BP’s long-term interests to take actions that enhance its reputation.

If BP is seen as a good corporate citizen in the communities where it does business, this will probably make it easier for BP to expand its operations in those communities in the future or to enter other communities.

THE FRIEDMAN DOCTRINE

Some people argue that a business firm has no obligation to pursue social goals. Nobel laureate Milton Friedman, for one, insists that social responsibility considerations should not enter the business decision process:

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 that it engages in open and free competition without deception or fraud.

Friedman explicitly rejects the idea that businesses should undertake social expenditures beyond those mandated by law and required for the efficient running of a business. For example, he suggests that improving working conditions beyond the level required by the law and necessary to maximize employee productivity will reduce profits and is therefore not appropriate.

His belief is that a firm should maximize its profits because that is how to maximize the returns that accrue to the owners of the firm, its shareholders. If shareholders wish to use the proceeds to make social investments, that is their right according to Friedman; but managers of the firm should not make that decision for them.

Although Friedman’s position is well stated, he would probably not object to social expenditures by businesses that have positive spillover effects for the firm. For example, BP clearly derives economic benefits from the positive publicity and goodwill that result from its social investments. Beyond this, it can be argued that socially responsible behavior by businesses can change society for the better, and that all benefit from such action.

For example, in the 1980s many large, successful American businesses withdrew their investments in South Africa to protest the white apartheid regime that denied political representation to people of African and Asian descent, who happened to be the vast majority of people living in South Africa. This action precipitated an economic crisis in South Africa, which was a contributing factor in the ultimate collapse of apartheid and its replacement by a democratic government. What this example illustrates is that corporations can be an instrument for social change and progress— and given this, many people believe that businesses should take social considerations into account when choosing their actions.


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