Social Responsibility of Business

Social responsibility of business implies the obligations of the management of a business enterprise to protect the interests of the society.

According to the concept of social responsibility the objective of managers for taking business decisions is not merely to maximize profits or sharehold­ers’ value but also to serve and protect the interests of other members of a society such as workers, consumers and the community as a whole.

Thus, Sachar Committee on Companies and MRTP Acts appointed by Government of India states, “In the development of corporate ethics we have reached a stage where the question of social responsibility of business to the community can no longer be scoffed at or taken lightly. In the environment of modern corporate economic development, the corporate sector no longer functions in isolation. If the plea of the companies that they are perform­ing a social purpose is to be accepted, it can only be judged by the test of social responsiveness shown to the needs of the society”.

It may be noted that some Indian sociologists and economists relate the idea of social responsibility of business of the Gandhian concept of trusteeship. According to Mahatma Gandhi, capitalist class owns wealth or capital as trustees of the society. The resources and capital they use for production of goods and services, according to him, should be used not to maximize profits for them but for the larger benefit of the society.

However, in our view, it will be too idealistic to expect that business enterprises will be purely guided by the benefits they confer on the society by their activities. The concept of social responsibility as used in management science is that businesses should maximize their profits subject to their working in a socially responsible manner to promote the interests of the society.

Their business activities should not harm other groups such as consumers, workers, and public at large. Mr. N.R. Narayana, Chairman of Infosys makes the idea of social responsibility of business quite clear when in a conference on corporate social responsibility he said, “Corporate’s foremost social responsibility is to create maximum shareholders’ value working in a way which is fair to all its stakeholders workers, consumers, the community, government and the environment He further points out.”

Working in harmony with the community and environment around us and not cheating our customers and workers we might not gain anything in the short run but in the long term it means greater profits and shareholders’ value’

Social Responsibility of Business and Social Contract

It is evident from above, the social responsibility of business implies that a corporate enterprise has to serve interests other than that of common shareholders who, of course, expect that their rate of return, value or wealth should be maximized.

But in today’s world the interest of other stakehold­ers, community and environment must be protected and promoted. Social responsibility of business enterprises to the various stakeholders and society in general is considered to be the result of a social Fig.1. Responsibility of Business Enterprises towards Stakeholders and Society in General contract.

Responsibility of Business Enterprises towards Stakeholders and Society in General

Social contract is a set of rules that defines the agreed interrelationship between various elements of a society. The social contract often involves a quid pro quo (i.e. something given in exchange for another). In the social contract, one party to the contract gives something and expects a certain thing or behaviour pattern from the other.

In the present context the social contract is concerned with the relationship of a business enterprise with various stakeholders such as shareholders, employees, consumers, government and society in general. The business enterprises happen to have resources because society consisting of various stakeholders has given them this right and therefore it expects from them to use them to for serving the interests of all of them.

Though all stakehold­ers including the society in general are affected by the business activities of a corporate enterprise, managers may not acknowledge responsibility to them. Social responsibility of business implies that corporate managers must promote the interests of all stakeholders not merely of shareholders who happen to be the so called owners of the business enterprises.

  1. Responsibility to Shareholders

In the context of good corporate governance, a corporate enterprise must recognise the rights of shareholders and protect their interests. It should respect shareholders’ right to information and respect their right to submit proposals to vote and to ask questions at the annual general body meeting.

The corporate enterprise should observe the best code of conduct in its dealings with the shareholders. However, the corporate Board and management try to increase profits or shareholders’ value but in pursuing this objective, they should protect the interests of employees, consumers and other stakeholders. Its special responsibility is that in its efforts to increase profits or shareholders’ value it should not pollute the environment.

  1. Responsibility to Employees

The success of a business enterprise depends to a large extent on the morale of its employees. Employees make valuable contribution to the activities of a business organization. The corporate enterprise should have good and fair employment practices and industrial relations to enhance its productivity. It must recognize the rights of workers or employees to freedom of association and free collective bargaining. Besides, it should not discriminate between various employees.

The most important responsibility of a corporate enterprise towards employees is the payment of fair wages to them and provide healthy and good working conditions. The business enterprises should recognise the need for providing essential labour welfare activities to their employees, especially they should take care of women workers. Besides, the enterprises should make arrange­ments for proper training and education of the workers to enhance their skills.

However, it may be noted that very few companies in India follow many of the above good practices. While the captains of Indian industries generally complain about low productivity of their employees, little has been done to address their problems. Ajith Nivard Cabraal rightly writes, “It should perhaps be realised that corporations can only be as effective and efficient as its employees and therefore steps should be taken to implement such reforms in a pro-active manner, rather than merely attempting to comply with many labour laws that prevail in the country. This is probably one area where good governance practices could make a significant impact on the country’s business environment.”

  1. Responsibility to Consumers

Some economists think that consumer is a king who directs the business enterprises to produce goods and services to satisfy his wants. However, in the modern times this may not be strictly true but the companies must acknowledge their responsibilities to protect their interests in undertaking their productive activities.

Invoking the notion of social contract, the management expert Peter Drucker observes, “The customer is the foundation of a business and keeps it in existence. He alone gives employment. To meet the wants and needs of a consumer, the society entrusts wealth-producing resources to the business enterprise”. In view of above, the business enterprises should recognise the rights of consumers and under­stand their needs and wants and produce goods or services accordingly.

The following responsibilities of business enterprises to consumers are worth mentioning:

  • They should supply goods or services to the consumers at reasonable prices and do not try to exploit them by forming cartels. This is more relevant in case of business enterprises producing essential goods such as life-saving drugs, vegetable oil and essential’ services such as electricity supply and telephone services.
  • They should not supply to the consumers’ shoddy and unsafe products which may do harm to them.
  • They should provide the consumers the required after-sales services.
  • They should not misinform the consumers through inappropriate and misleading advertise­ments.
  • They should make arrangements for proper distribution system of their products so as to ensure that black-marketing and profiteering by traders do not occur.
  • They should acknowledge the rights of consumers to be heard and take necessary measures to redress their genuine grievances.

The organized movement to protect consumer rights which is termed as consumerism has been the result of the negligence of business enterprises to their responsibilities to consumers. Besides, due to the indifferent attitude of business enterprises to consumer rights, Government has been compelled to enact Consumer Protection Act to protect consumers’ rights and to prevent their exploitation by the businesses.

  1. Obligation towards the Environment

The foremost responsibility of business enterprises is to ensure that they should not damage the environment and for this purpose they should reduce as much as possible air and water pollution by their productive activities. They should not dump their toxic waste products in rivers and streams to avoid their pollution. Pollution of environment poses a great health hazard for the people and is a cause of several respiratory and skin diseases.

  1. Responsibility to Society in General

Business enterprises function by public consent with the basic objective of producing goods and services to meet the needs of the society and provide employment to the people. The traditional view is that in performing this function businesses maximize profits or shareholders’ value and doing so they do not behave in any socially irresponsible way.

In the present world where there are monopolies, oligopolies in product and factor markets and also there are externalities, especially detrimental externalities such as environment pollution by the activities of business enterprises maximization of private profits does not always lead to the maximization of social benefit.

In fact in such imperfect market conditions, consumers are exploited by raising of prices much above the cost of production, workers are exploited as they are not paid fair wages equal to the value of their marginal product. Besides, there are harmful external effects to which are not given due considerations by private enterprises in making their business decisions. Therefore, there is urgent need to make business enterprises behave in a socially responsible manner and to work for promoting social interests.

In view of the above in the context of modern developments, it is hard to agree with Milton Friedman, a winner of Nobel Prize in economics, who called the idea of corporate social responsi­bility as a “fundamentally subversive doctrine”. Friedman writes, “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”.

However, few economists and rational thinkers will subscribe to Friedman’s views like that of Adam Smith. Thus, authors of a noted textbook on management write, “It is true that Friedman sets a rather high standard when he suggests that businesses should operate within the ‘rules of the game’, practicing neither deception nor fraud. The rules of the game obviously include accepted ethical practices, in addition to international, national and other laws. How many corporations are willing to tell the absolute truth in the advertisements and to engage in open and fair competition avoiding collusion, price fixing and so forth. The fact is that few subscribe to Friedman s hard-line views today”.

Expressing the same sentiments, Dr. Manmohan Singh, who has been instrumental in initiating economic reforms promoting liberalization and privatization, in his recent speech while inaugurating the campus of Institute for Studies in Industrial Development on May 1, 2007 said, “I was struck by a comment in the media that most of the billionaires among India’s top business leaders operate in oligopolistic markets and in sectors where the government has conferred special privileges on a few. This sounds like a crony capitalism……. Are we doing enough to protect consumers and small businesses from the consequences of modern capitalism in our country” Later, on May 24, 2007, while giving inaugural address at the Annual Session of CII he urged the captains of Indian industry to break cartels and abstain from greed in their quest for profit maximisation.

To quote him, “The operation of cartels by groups of companies to keep prices high must end. It is unacceptable to obstruct the forces of competition from having free play. It is even more distressing in a country where the poor are severely affected by rising commodity prices. Cartels are a crime and go against the grain of an open economy”. More importantly, he further adds, “Maximization of profits should be within the bounds of decency and greed”.

The above views of Dr. Manmohan singh show that corporate businesses in India do not show any sense of social responsibility and due to oligopolies, informal collusion and other malpractices fleece the customers by charging higher prices in order to maximize their profits. This is clearly refutation of Friedman’s view that profit maximization always implies social responsibility of business.

Business enterprises have a lot of responsibility to the society at large.

  1. To take appropriate measures to reduce level of pollution and adopt eco-friendly technologies.
  2. To generate sufficient employment opportunities so as to make good contribution to the reduction of poverty in the country.
  3. Respect the rights of workers and other employees and take appropriate measures to ensure their safety and to improve their working conditions.
  4. To provide quality healthcare to their employees.
  5. To invest adequately in the research and development so as to make innovations to improve their productivity.

Dr. Manmohan Singh in the speeches referred to above adds the following social responsibilities of the corporate enterprises in India:

  1. Do not pay excessive remuneration to promoters and senior executives as it creates social resentment.
  2. To end cartels that keep prices highly
  3. To implement affirmative action and to provide jobs to SCs, STs and OBCs. Besides, Dr. Manmohan Singh wants the private corporate sector to give preference to minorities, especially Muslims in providing employment.
  4. To resist to pay bribes to officials and therefore do not promote corruption. He thus says, “Corruption need not be the grease that oils wheels of progress. There are many successful companies today that have refused to yield to this temptation. Others must follow”.

Social responsibility is related to the concept of ethics. Ethics is the discipline that deals with moral duties and obligations. Social responsibility implies corporate enterprises should follow business ethics and work for not only to maximize their profits or shareholders’ value but also to promote the interests of other stakeholders and the society as a whole.

Two instances of lack of social responsibility of business witnessed in India are worth mentioning. One refers to Bhopal Gas Leak Tragedy. On Dec. 2,1984 in a pesticide factory located in Bhopal and owned by a multinational corporation ‘Union Carbide Limited (UCL), there was a leakage of poisonous gas from factory which resulted in the death of more than 2000 poor people and about 2 lakh persons were badly injured and crippled.

This was due to the non-installation of safety measures by the company. Union Carbide tried to show that it was not responsible. A long legal battle was fought and ultimately Union Carbide was held responsible by the court and was asked to pay $ 650 millions to the victims as damages.

Another recent case of lack of corporate social responsibility in India and failure of good corpo­rate governance in India is provided by Satyam Saga. Ramalinga Raju, chairman of Satyam Computers Committed fraud running into several thousand crores inflicting heavy losses to the shareholders and lenders of the company. For this criminal act Raju is in Jail and his company has been taken over by Mahindera.

This Satyam fraud raises the question of failure of corporate governance in India, especially the role of independent directors in ensuring good governance of the corporates. The above two examples should serve as a wake-up call for Indian corporate businesses that they should discharge their responsibility to their customers, employees, other stakeholders and society at large.

Components of Corporate Social Responsibility

  1. Community Involvement

It refers to a wide range of actions taken by companies to maximize the impacts of their spending, time products, services for the welfare of community at large.

  1. Human Rights

The business practices can profoundly affect the rights and dignity of employees and communities. The main focus is on developing workplace free from discriminations where creativity and learning can flourish decent codes of profession conduct and where a proper balance can he created.

  1. Labour Security

It includes freedom of association and the effective recognition of the right to collective bargaining, the eliminations of all forms of forced and compulsory labour, the effective abolition of child labour and the eliminations of discrimination in respect of employment and occupation.

  1. Environmental Protection

The environmental issues have been global concerns thus the corporate sector also focuses on finding sustain able solutions for natural resources and to reduce companies’ impact on environment. Over the past several years, environmental responsibility has expanded to involve substantially more than compliance with all applicable government regulations or even a few initiatives such as recycling or energy efficiency.

Many citizens, environmental organizations and leadership companies define environmental responsibility as involving a comprehensive approach to company’s operations, products and facilities including assessing business, products, processes and maintained balance between work and other aspects of life.

  1. Business Standard

It covers a broad area of corporate activist such as ethics, financial return and environment protections.

  1. Educations and Leadership Development

As education is one of the key elements of sustainable development and pro-poor growth, businesses, working together with public sector and civil society can make an important contribution in providing access to quality education for all further companies can also make more critical impact on the development process by raising standards in corporate education and leadership development.

Importance of Corporate Social Responsibility

The notion that discharging corporate social responsibility involves costs and, in turn, reduces profits has proved wrong without doubt. Rather, it has been well established that discharging social responsibility strengthens the corporation’s foundation to earn profit not just in the short-run but also in the long- run. Numerous such stories abound in the corporate world.

Johnson & Johnson presents one classical example of how a company puts public welfare ahead of its own interest (profit), especially when the company itself is a victim. 28 September 1982 was a tragic day for Chicago when Johnson & Johnson made Extra Strength Tylenol caused cyanide poisoning and killed many people.

Showing its utmost concern for social welfare, Johnson & Johnson not only cooperated with the efforts to investigate into the incident, but also announced a reward of $ 1, 00,000 for giving information about the culprit.

The Tylenol crisis cost Johnson & Johnson plenty some $ 50 million besides withdrawal of 31 million bottles from the market with a retail value of over $ 100 million. Potentially, the most devastating cost resulted from lost public confidence. Only six weeks after it had withdrawn all Tylenol capsules from the market, the company reintroduced the product in tamper-proof packages, as are used in all of today’s pharmaceutical products.

Amazingly, Johnson & Johnson regained 95 per cent of the market share it had before the Tylenol crisis (Waldholz 1982). Johnson & Johnson’s this vignette clearly exemplifies how concern for social welfare strengthens an organisation’s foundation, better call it “Organisational Character” and, in turn, its profit earning capacity. Character is foundation for over all prosperity. As Swami Vivekananda also said: “First build character, everything else will follow”.

Maruti Udyog Limited (MUL) is another such example that kept social welfare ahead of its interest. In the year 1997, of all the cars sold between January and April, this responsible company recalled about 50,000 of their most popular product, the Maruti 800 passenger cars from the market, because they suspected them to be made of inferior steel. This became a newspaper headlines, as it was the biggest ever recall of cars from the Indian market place.

The logic behind this positive relationship appears to be that social involvement of business provides a number of benefits to it that more than offset its costs. These benefits would include a positive consumer image, a more dedicated and motivated workforce, strong public confidence, social acceptance, and even less interference from regulating agencies.

One way to understand the relevance of corporate social responsibility lies in our ancient teaching of Propkaram Paramam Dharma, i.e., helping others, what the sociologists call, altruism, is the most sacred duty. Performing duty is “Dharma” and “Dharma” is truth.

Truth prevails in its own manifestations and lasts for long. Our past is witness that in all walks of life, at last satyamev jayate, i.e., ultimately truth alone prevails and wins. Cooperate social responsibility is a company’s ‘dharma’ that enables the company to survive and thrive for long.

Just as any untruth is short lived, so is an untruth or unethical business too. There are plethora of corporate examples like Arthur Anderson, Enron, Union Carbide, Harshad Mehta Stock Business and so on confirming that no business can exist and survive without the acceptance and sanction of the society in which it carries out its activities. Without social sanction, business is sure to flounder and perish.

Following are some more justifications in favour of why corporations should discharge social responsibility. Many of these (Mintzerg 1983) tend to be couched in terms of enlightened self- interest, i.e., the corporation takes on social responsibilities insofar as doing so promotes its own self-interest.

  1. Corporations perceived as being socially responsible might be rewarded with extra and/or more satisfied customers, whilst perceived irresponsibility may result in rejection or boycott by customers. Pepsi and Coca-Cola experienced such boycott from customers in India in 2007.
  2. Research reports that employees are attracted to and even become more committed to corporations that show socially responsible behaviour (Greening and Turban 2000).
  3. Corporations that voluntarily commit to social actions and programmes may also forestall legislation and ensure greater corporate independence from government.
  4. Making positive contribution through socially responsible behaviour to society might be regarded as a long-term investment in creating an improved and stable business context to do business.

In addition to above business justifications couched in favour of corporate social responsibility, following are some important moral justifications also in favour of Corporate Social Responsibility (CSR):

  1. Corporations through their actions cause some social problems like pollution, dirtiness, etc. and hence they have a moral responsibility to solve these problems caused by them and also make efforts to prevent such problems in future.
  2. Corporations as social actors use social resources which are often scarce. Hence, they should use these resources in responsible manner for the benefit of the society.
  3. Corporate activities of one type or other like providing products and services, employment to workers, and so on and so forth, have social impacts be positive or negative or neutral. Hence, corporations are responsible to own the responsibility of these impacts.

In reality, corporations rely not only on the contributions of shareholders but also of wide constituencies, or say, stakeholders in society such as consumers, suppliers, local communities, etc. Hence, corporations have a duty to take into account the interests and goals of shareholders as well as other stakeholders.

Given the range of justifications in favour of CSR, there has not been any doubt about the need for and significance of socially responsible behaviour exhibited by the corporations.

Forms of Corporate Social Responsibility (CSR)

Among the organizational researchers who have tried from time to time to identify and describe the various forms of CSR, probably the most established and accepted model of CSR which addresses the forms of CSR is the one called ‘Four-Part Model of Corporate Social Responsibility’ as proposed by Archie Carroll and subsequently refined later by Carroll and Buchholtz. This model is depicted in the following Figure 1.Carroll’s Four-Part Model of Corporate Social Responsibility. According to Carroll, CSR is a multi-layer concept consisting of four inter-related aspects of responsibilities, namely, economic, legal, ethical, and philanthropic. He presents these different responsibilities as consecutive layers within a pyramid.

Hence, he offers the definition of CSR in these words: “Corporate social responsibility encompasses the economic, legal, ethical, and philanthropic expectations placed on organizations by society at a given point in time.”

Fig: Carrol’s 4 part model of CSR

  1. Economic Responsibility

A corporation has to meet its economic responsibilities in terms of reasonable return to investors, fair compensation to employees, goods at fair prices to customers, etc. Thus, meeting economic responsibility is the first-layer of responsibility and also the basis for the subsequent responsibilities. The fact remains that meeting economic responsibility is must for all corporations to survive in the time.

  1. Legal Responsibility

The legal responsibility of business corporations demands that businesses abide by the law of land and play by the rule of the game. Laws are the codification of do’s and don’ts do’s in the society.

Abiding by laws is the prerequisite for any corporation to be socially responsible. Corporate history is replete with instances where violation of laws disallowed corporations to run any longer. Enron, Union Carbide, Global Trust Bank, etc. are some of such illustrative corporate cases of social rejection and boycott.

  1. Ethical Responsibility

These responsibilities refer to obligations which are right, just, and fair to be met by corporations. Just abiding by law, procedure, and rule and regulations does not make business conduct always as ethical or good. The conduct of corporations that go beyond law and contribute to social well being is called ethical.

Hence, corporations have an ethical responsibility to do, even going beyond law and rule and regulations, what proves good for the society. In other words, ethical responsibilities consist of what is generally expected by society from corporations over and above economic and legal expectations.

  1. Philanthropic Responsibility

The Greek word ‘philanthropy’ means literally ‘the love of the fellow human.’ The use of this idea in business context incorporates activities that are, of course, within the corporation’s discretion to improve the quality of life of employees, local communities, and ultimately society at large.

Making donations to charitable institutions, building of recreational facilities for employees and their families, support for educational institutions, supporting art and support activities, etc. are the examples of philanthropic responsibilities discharged by the corporations. It is important to note that the philanthropic activities are desires of corporations, not expected by the society.

Dimensions of CSR

The facets and dimensions of corporate social responsibility include the obligations a business has to its interest groups also called ‘stakeholders.’ The stakeholders in a business include shareholders / owners, consumers, employees, government, society, etc.

These are depicted in the following diagram:

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