The stakeholder view holds that there are many groups in society with an interest in the organisation's
activities. Some firms have objectives for these issues. Some argue, however, that a business's only objective should be to make money: the State, representing the public interest, can levy taxes to spend on socially desirable projects or can regulate organisational activities.
Not only does the environment have a significant influence on the structure and behaviour of organisations, but also organisations have some influence on their environment.
Since organisations have an effect on their environment, it is arguable that they should act in a way which shows social awareness and responsibility.
'A society, awakened and vocal with respect to the urgency of social problems, is asking the managers of all kinds of organisations, particularly those at the top, what they are doing to discharge their social responsibilities and why they are not doing more.'
Koontz, O'Donnell and Weihrich
Social responsibility is expected from all types of organisation.
(a) Local government is expected to provide services to the local community, and to preserve or
improve the character of that community, but at an acceptable cost to the ratepayers. (b) Businesses are expected to provide goods and services, which reflect the needs of users and
society as a whole. These needs may not be in harmony – arguably, the development of the Concorde aeroplane and supersonic passenger travel did not contribute to the public interest, and caused considerable inconvenience to residents near airports who suffer from excessive aircraft noise. A business should also be expected to anticipate the future needs of society; examples of socially useful products might be energy-saving devices and alternative sources of power. (c) Pollution control is a particularly important example of social responsibility by industrial
organisations, and some progress has been made in the development of commercial processes for re-cycling waste material. British Coal attempts to restore the environment by planting on old slag heaps.
(d) Universities and schools are expected to produce students whose abilities and qualifications will
prove beneficial to society. A currently popular view of education is that greater emphasis should be placed on vocational training for students.
(e) In some cases, legislation may be required to enforce social need, for example to regulate the
materials used to make crash helmets for motor cyclists, or to regulate safety standards in motor cars and furniture. Ideally, however, organisations should avoid the need for legislation by taking
earlier self-regulating action.
3.1 Social responsibility and businesses
Arguably, institutions like hospitals, schools and so forth exist because health care and education are seen to be desirable social objectives by government at large, if they can be afforded.
However, where does this leave businesses? How far is it reasonable, or even appropriate, for businesses to exercise 'social responsibility' by giving to charities, voluntarily imposing strict environmental
objectives on themselves and so forth?
One school of thought would argue that the management of a business has only one social responsibility, which is to maximise wealth for its shareholders. There are two reasons to support this argument:
(a) If the business is owned by the shareholders the assets of the company are, ultimately, the shareholders' property. Management has no moral right to dispose of business assets (like cash) on non-business objectives, as this has the effect of reducing the return available to shareholders. The shareholders might, for example, disagree with management's choice of beneficiary. Anyhow, it is for the shareholders to determine how their money should be spent.
(b) A second justification for this view is that management's job is to maximise wealth, as this is the best way that society can benefit from a business's activities.
(i) Maximising wealth has the effect of increasing the tax revenues available to the State to disburse on socially desirable objectives.
(ii) Maximising wealth for the few is sometimes held to have a 'trickle down' effect on the disadvantaged members of society.
(iii) Many company shares are owned by pension funds, whose ultimate beneficiaries may not be the wealthy anyway.
This argument rests on certain assumptions.
(a) The first assumption is, in effect, the opposite of the stakeholder view. In other words, it is held that the rights of legal ownership are paramount over all other interests in a business: while other stakeholders have an interest, they have few legal or moral rights over the wealth created. (b) The second assumption is that a business's only relationship with the wider social environment is
an economic one. After all, that is what businesses exist for, and any other activities are the role of the State.
(c) The defining purpose of business organisations is the maximisation of the wealth of their owners.
Henry Mintzberg (in Power In and Around Organisations) suggests that simply viewing organisations as
vehicles for shareholder investment is inadequate.
(a) In practice, he says, organisations are rarely controlled effectively by shareholders. Most shareholders are passive investors.
(b) Large corporations can manipulate markets. Social responsibility, forced or voluntary, is a way of recognising this.
(c) Moreover, businesses do receive a lot of government support. The public pays for roads,
infrastructure, education and health, all of which benefits businesses. Although businesses pay tax, the public ultimately pays, perhaps through higher prices.
(d) Strategic decisions by businesses always have wider social consequences. In other words, says Mintzberg, the firm produces two outputs: goods and services and the social consequences of its activities (eg pollution).
3.1.1 Externalities
If it is accepted that businesses do not bear the total social cost of their activities, then the exercise of social responsibility is a way of compensating for this.
An example is given by the environment. Industrial pollution is injurious to health: if someone is made ill by industrial pollution, then arguably the polluter should pay the sick person, as damages or in
compensation, in the same way as if the business's builders had accidentally bulldozed somebody's house.
In practice, of course, while it is relatively easy to identify statistical relationships between pollution levels and certain illnesses, mapping out the chain of cause and effect from an individual's wheezing cough to the dust particles emitted by Factory X, as opposed to Factory Y, is quite a different matter.
Of course, it could be argued that these external costs are met out of general taxation: but this has the effect of spreading the cost amongst other individuals and businesses. Moreover, the tax revenue may be spent on curing the disease, rather than stopping it at its source. Pollution control equipment may be the fairest way of dealing with this problem. Thus advocates of social responsibility in business would argue that business's responsibilities then do not rest with paying taxes.
However, is there any justification for social responsibility outside remedying the effects of a business's direct activities? For example, should businesses give to charity or sponsor the arts? There are several reasons why they should.
(a) If the stakeholder concept of a business is held, then the public is a stakeholder in the business.
A business only succeeds because it is part of a wider society. Giving to charity is one way of encouraging a relationship.
(b) Charitable donations and artistic sponsorship are a useful medium of public relations and can
reflect well on the business. It can be regarded, then, as another form of promotion, which like advertising, serves to enhance consumer awareness of the business, while not encouraging the sale of a particular brand.
The arguments for and against social responsibility of business are complex ones. However, ultimately they can be traced to different assumptions about society and the relationships between the individuals and organisations within it.
Question
Ethics
The Heritage Carpet Company is a London-based retailer which imports carpets from Turkey, Iran and India. The company was founded by two Europeans who travelled independently through these countries in the 1970s. The company is the sole customer for carpets made in a number of villages in each of the source countries. The carpets are hand woven. Indeed, they are so finely woven that the process requires that children be used to do the weaving, thanks to their small fingers. The company believes that it is preserving a 'craft', and the directors believe that this is a justifiable social objective. Recently a UK television company has reported unfavourably on child exploitation in the carpet weaving industry. There were reports of children working twelve hour shifts in poorly lit sheds and cramped conditions, with consequent deterioration in eyesight, muscular disorders and a complete absence of education. The examples cited bear no relation to the Heritage Carpet Company's suppliers although children are used in the labour force, but there has been a spate of media attention. The regions in which the Heritage Carpet Company's supplier villages are found are soon expected to enjoy rapid economic growth.
What boundary management issues are raised for the Heritage Carpet Company?
Answer
Many. This is a case partly about boundary management and partly about enlightened self-interest and
business ethics. The adverse publicity, although not about the Heritage Carpet Company's own suppliers, could rebound badly. Potential customers might be put off. Economic growth in the area may also mean that parents will prefer to send their children to school. The Heritage Carpet Company as well as promoting itself as preserving a craft could reinvest some of its profits in the villages (eg by funding a school), or by enforcing limits on the hours children worked. It could also pay a decent wage. It could advertise this in a 'code of ethics' so that customers are reassured that the children are not simply being exploited. Alternatively, it could not import child-made carpets at all. (This policy, however, would be unlikely to help communities in which child labour is an economic necessity. Children already living on the margins of subsistence might end up even more exploited, in begging or prostitution.)