Social responsibility and its function within business

Social responsibility and its function within businessFormative Assignment

Christian Langenberg, Shakeela Khan, Namakau Katundu

This presentation will discuss social responsibility and its function within business. Contributors to this formative assignment were Christian Langenberg, Shakeela Khan and Namakau Katundu1

Opening StatementThe Social Responsibility of Business is to Increase its Profits Milton Friedman, 1970

This statement by Milton Friedman reflects the traditional profit-maximizing theory. The rationale behind this theory derives out of the assumption that organizations are led by their owners or the people that are financially invested in it. It is assumed, that the owners or investors will look for a financial return that at least compensates for their opportunity costs expressed in potential alternative investment forms. Friedmans view is closely related to the agency problem, which describes potential differences in values and objectives between people who own the company or stakes within the company (owner/shareholder) and the people who run the day to day business (managers). In this sense, Friedman points out that the managers responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible.

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Supportive views

No responsibilityCSR should not be the responsibility of corporations where individual investors interests are not democratically representedbusinesses give to anything that is tied into the businesss managers or employees personal beliefs, instead of being tied into well thought out social or business objectives (Porter and Kramer 2012)

There is no positive perpetual relationship between CSR and profitability

Business must put their business needs before their CSR

Friedman asserts that when managers act socially responsible, they tend to favour causes that are aligned with their own belief which in effect does not represent the interest of the shareholders or even other stakeholders. This is true of most managers and according to Michael E. Porter, many businesses give to anything that is tied into the businesss managers or employees personal beliefs, instead of being tied into well thought out social or business objectives (Porter and Kramer, 2012 p.6).However, as we will later see, despite the altruistic actions of many firms, most do not engage in CSR without thought to the bottom line.

There is no positive perpetual relationship between CSR and profitability. So unless one can gain advantages from it, then it may not be worth engaging in. Mintzberg argues that firms may be rewarded up to a certain extent for engaging in CSR and after that there is diminishing return (Carroll,100)

Businesses cannot engage in CSR without thought to the bottom line. For without positive financial performance, then there will be no extra to spend on social responsibilities. As Zadek pointed out, in this highly competitive world, firms cannot only think altruistically, but must give thought to how they allocate their resources and must put their business needs before their CSR (6, 2011). That is not to say though that businesses cannot behave socially responsible, but it is difficult to decide what actually constitutes socially responsible. Therein lies the problem.

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Shareholder valueImportant differentiation between privately and publicly held companies.

ValueAct Capital hedge fund will push for change with the support of others to advance their agenda for change (AllthingD Article)

In the overall CSR discussion, it is worth differentiating between privately owned and pubicly held companies. Owners of privately held companys invest their own money when engaging in social activities and tend to be in general closer to the community. Puclicly listed companies are typically owned by institutions such as hedge funds or pension funds. These companies are beind held accountable to generate profits by their customers, for example to enable them to pay out pensions.The pressure such funds can put on organization has been recently highlighed in an aritcle which states that Microsoft becomes increasingly under pressure to focus on shareholder returns since the ValueAct Capital hedge fund purchased 1% of the entire Microsoft stock. The hedgefund purchased the stock with the objective to push for change with the support of others to advance their agenda for change (AllthingD Article). This quote reflects that if a group of shareholders is not satisfied with the resulting return of the organization, it can potentially actively seek for a change in stewardship. 5

Counter Argument

Towards greener growth through CSR

The Rio+ 20 Conference held in Rio De Janeiro, Brazil from 20th t0 22nd June 2012, brought together different stakeholders to deliberate and chart progress on the issue of sustainable development. As part of the commitment statement by stakeholders it was recognised that sustainable development can only be achieved with a broad alliance of people, governments, civil society and the private sector, all working together to secure the future we want for present and future generation. This working together in this context can be described as the Corporate Social Responsibility of these stakeholders to address issues pertaining to Climate Change, Biodiversity and Combating Desertification.Milton Friedman recognized that it would be in the long term interest of a corporation to contribute a part of its resources to a viable cause in the community thus reducing its contribution in taxes to the respective Government. In the same way following the Rio+20 conference which was an action-oriented conference, all stakeholders, including major public and private groups, the UN System, IGOs and member states were invited to make commitments focusing on delivering concrete results for sustainable development on a voluntary basis.By the end of the Conference, over 700 voluntary commitments were announced and compiled into an online registry managed by the Rio+20 Secretariat, initiating a new bottom-up approach towards the advancement of sustainable development. It is clear to see that these initiatives and commitments can not be undertaken without resources whilst at the same time underlying the importance that the primary objective of most business is to generate financial resources. For example a private University may commit to this cause by establishing a syllabus dedicated to educating students on renewable energy but in order to implement the deliverance of that module, it would have to charge tuition and other fees for the new programme. In the same way, an industrial firm manufacturing various products may outline its commitment in the form of utilizing more energy efficient ways of production but any cost of implementing the new technology would be borne ultimately in the cost of the products to the clientele of the industry. This ensures that the business still remains viable and intentionally profitable.7

Determining ProfitNormal Profit

Abnormal Profit

The opportunity cost of establishing a business by its owners can be defined as the potential profit of that firm and this is normal profit.Abnormal profit is the difference between total profit and normal profit.How is abnormal profit determined. Lets take for example the Swedish clothing firm of H&M who have committed to more sustainable production methods for cotton growing and processing.The committed deliverable states that 100% of our cotton should come from more sustainable sources, i.e. a combination of organic cotton, re-cycled cotton and better cotton. Through the Better Cotton Initiative H&M aims to produce 300,000 tonnes of cotton lint as Better Cotton, in Brazil, India, Pakistan and West and Central Africa.The community service initiative a clear case of CSR whilst allowing for better cotton production will inevitably also result in increased prices for the products sold by H&M as organic products are always higher priced than synthetic products but the goodwill of the CSR can not be overlooked at all.Since H&M has committed to a defined timeline and project implementation cost, it is in the best interest of its management to ensure that more revenue is generated and profits invested so that the commitment to the project is not undermined.Similarly the NIKE Inc aims to achieve 20% reduction in CO2 emissions per unit (measuring energy and emissions based on footwear) from FY11 levels through FY15 (in aggregate from assessed footprint in the built environment, logistics and footwear manufacturing). This is a global initiative and needless to say the profits of NIKE are not likely to decrease but to increase because of the nature of the products sold.Another interesting case is that of Deloitte UK, which has initiated Our Green Journey which was a development arising from engagement with key stakeholders (including clients and Deloitte professionals) and evaluation of strategic considerations. Deloitte UK is committed to assisting firms report correctly and monitor their Corporate Social Responsibility activities. These services are not offered freely but do go a long way to contributing to the CSR activities of the reporting firms as their service to the community is clearly articulated and recorded. 8

Managing Corporate Social Responsibility

Based on the nature of certain global industrial organizations it has become imperative for these to incorporate corporate responsibility as part of their business and growth strategy to avoid costs in the long term associated with not addressing issues that would affect the community in the short term.The giant steel firm of Arcelormittal as committed to implementing a clearly articulated corporate responsibility governance strategy through a dedicated unit.Our approach to corporate responsibility has evolved considerably over the last five years and is increasingly integral to the way we manage our business. As a result, corporate responsibility is now a fundamental part of our mainstream governance processes and reporting

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Profit maximization The primary objective?Is profit maximization indeed in the interest of business?Alternative maximizing theories - Profit satisficers (Hinde 2012)

EmployeesOrganization

Employee motivation base primarily on intrinsic motivationPeople prefer organizational culture, personal development and people before financial bonuses(Cannell & Wood 1992, Langenberg 2013)Investments into green growth proofed to positively impact long-run profitPassion for business and satisfied customers, will impact profits positively(Hallegatte et al. 2012,Kay 1998)

Before expanding on the role of social responsibility in business, it is worth to question Friedmans theory that investing shareholder profits into non-profit generating projects makes managers fail as agents. This statement assumes that business will only benefit from short-run profit maximizing actions. But is this really the case?Alternative economic theories suggest that organizations can thrive for multiple objectives, whereas profit maximization is merely one of them. Managers try to achive sufficient profit level but focus on the achievement of other goals that can include economic objectives such as sales revenue maximization or growth maximization but also goals such as being a market leader or improving employee and customer satisfation. Such organizations are also known as profit satisficers (Hinde 2012 page 287). The aspect of increasing employee and customer satisfaction is an interesting concept. Academic theories tie improved motivation closely with improved organizational performance. Motivating employees is also confirmed not to be primarily financially driven, but due to so called intrinsic motivation. This form of motivation derives out of an internal drive towards something based on interest or enjoyment. Cannel & Wood (1992) suggest that things such as individual recognition, promotion and job qualities are primary driver for employee motivation. A recent Durham MBA assignment investigating the impact of variable pay on employee motivation confirmed that employees value things like company culture, people and career development more than a high financial bonus.On an organizational level, social responsible project significantly add to customer satisfaction and even increased revenue in the long run. Stphane Hallegatte, Geoffrey Heal, Marianne Fay and David Trguer describe in an article about green growth the economic benefit of sustainability programs. One such example related to the input effect describes the regeneration of fish stocks by implementing fishing quotas. While this impact the fishing industry in the short run, it ensures future fishing opportunities in the future. John Kay (Kay 1998), an opponent of the profit-maximizing theory identified various successful businesses that were not primarily driven by profit maximization but rather by the drive to simply be good businesses. Such objective primarily derives out of pure passion for the business, industry or technology. Measured by satisfied customers, motivated employees, well-rewarded investors and high reputation within their communities, organizations can indeed combine a passion for business with measurable success. If these measured are aligned and achieved properly, profits will follow.

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Real World ExamplesImproving Customer and Partner Experience (CPE) is one of Microsofts primary business objectivesCustomer and Partner satisfaction is fundamental for MS to maintain its market position and secure future revenue

73% of businesses indicate cost savings as one of the top 3 reasons to engage in CSR (Pricewaterhouse Coopers in Carroll Vol 12 (1) p.97 )

For real world example of an organiztion that focuses on customer satisfaction is Microsoft. Microsoft carries high Customer Partner Experience (CPE) as a continuous organizational objective in their full year key initiatives. Generating most of their sales revenue through OEM customers (HP, DELL etc.) and channel partners puts enormous pressure on Microsoft to remain the partner of choice in order to stay competitive against companies such as Google or Samsung (Microsoft internal document). Every year, Microsoft performs a so called NSAT survey that asks its customers and partners a series of questions in relation to quality, satisfaction with the service or the account management. Based on the feedback Microsoft implements large scale and sometimes costly projects that work on improving the overall NSAT score. The strategy behind this is that Microsoft seeks to maintain its market position and secures future sales revenue by maintaining customer satisfaction.

------Despite the altruistic actions of many firms, most do not engage in CSR without thought to the bottom line. Therefore, Milton Friedmans assertion that the social responsibility of business is to increase its profits is an accurate reflection of how firms view their obligations. However, engaging in CSR actually works for many businesses as they gain cost reduction and competitive advantage and goodwill/reputation benefits. Indeed, in a survey performed by Pricewaterhouse Coopers which asked business executives to identify why companies were becoming more socially responsible, 73 percent indicated cost savings as one of the top three reasons (Carroll Vol 12 (1) p.97). Businesses also use CSR to gain competitive advantage. They also use CSR for solidifying reputation and goodwill within a community. In fact, there have been instances where the advertisement bill for the CSR greater than the CSR bill.

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Alternative viewsCompanies are stuck in a social responsibility mindset.Shared value is at the center of what companies do and creates economic value for business and society.Purpose of corporation is to create shared valueNo value redistribution but extension of economic and social values

Companies are stuck in a social responsibility mindset means that businesses perceive societal issues at the periphery and not at the core. The question is not how much businesses should do satisfy the CSR side of things but rather how to reorganize the entire value framework towards shared value. Creating shared value involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Porter goes as far as claiming that the purpose of the corporation must be redefined as creating shared value, not just profit per se. But lets hear from Porter himself.12

Business obligationsBusiness has more than one obligation

Business should partner with governments to set legislation We need to work in a collective way (Bill Weldon, former CEO of Johnson and Johnson)

Statistics and scenario planning can help managers to determine if their course of action may have the desired social impact

Business should align their philanthropic activities with their core competencies

While many may hold this view, I contend that business has more than one obligation. As Carroll has stated Freidmans view is a traditional one that represents an old contract with business and society. Now there is a modern view which is more representative of current business and society and holds that stakeholders expect economic, ethical, legal and philanthropic responsibilities from businesses (2010, Vol. 12, p.97). For instance, if a natural disaster occurred and drinking water was compromised, effectively endangering many lives, should water bottling companies use this as an opportunity to increase prices and maximise profits? If Friedmans rhetoric is used, then the answer is yes.

Friedman further argues that social issues should be dealt with by the government and legislation. While this statement certainly has merit, I would go one step further and point out that businesses should help partner with government to set the legislation. Indeed, business must help with social responsibility. One group cannot be held responsible. According to Bill Weldon of Johnson and Johnson, if we do not align ourselves and work in a collective way on these social issues, everybody will be worse off. (McKinsey and Company, 16, 2010).

Freidman also claims that by giving businesses social responsibility, we are placing too much power in their hands. As Friedman says, businessmen will simultaneously be legislator, executive and jurist. They could become self-regulators in which case opportunities are created for businesses to act irresponsibly. For example, monopolies that fix prices.He further argues that they cannot know what impact their actions would have on social issues as they are not knowledgeable about those situations. I think this is too simplistic a view and does not accurately reflect most businessmens acumen. To put it into perspective: managers cannot know for sure that the product he is going to produce will have the expected level of success, but he may use statistics or trends or scenario planning etc to help him with his decision. Similarly, managers can do the same with social issues aided by advice from the in-house economist which most large organizations employ nowadays.

If businesses align their philanthropic activities with their core competencies, not only do they not get distracted from their core business, but they also augment their altruistic activities. For instance, Home Depot Inc. has been providing advice on rebuilding communities to the victims of Hurricane Katrina (Carroll, 2010, 98).

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Conclusion

ConclusionThe level of engagement in CSR divides the business environment until today.Firms must generate enough profit to satisfy their key investors needs.Leading organizations increasingly seek balance between profit maximization and social engagements.To increase efficiencyTo increase customer and employee satisfaction Shared value fundamentally redefines capitalism and could become the next business paradigm.

Friedmans assertion that a business obligation is to increase its profits are well supported. In fact, many shareholders will replace their directors/managers if they do not get returns on their investment. Furthermore, even if organizations want to be socially responsible, conflict of interests arise as managers would prefer to invest in causes closer to their beliefs. Firms must also allocate their resources responsibly: in other words, they cannot engage in CSR without first giving thought to their business needs.As already discussed many counterarguments exists to Friedmans traditional view. Most recent attitude change towards CSR was clearly seen at the conference in Rio + 20 Conference where it was agreed that firms engage in a bottoms up approach that is they engage in CSR without sacrificing their financial viability. Multinational corporations such as Nike and H&M are engaging in CSR and some companies like ArcelorMittal are clearly articulating it in their corporate strategy. Surely, this is indicative of how the perception of CSR is changing. Recent studies have also shown that customers and employees are increasingly satisfied when organizations engage in CSR, and if they are happy, then profits will follow. Thus organizations know that CSR is one way to remain competitive and ultimately profitable.Michael Porter introduced the concept of Shared Value that completely redefines business thinking and shifts values towards creating value for investors but also society at large. While it will still take time until organizations embrace its potential, it certainly has the potential to become the next business paradigm of the future.

Winston Churchill once said, the price of greatness is responsibility. While he may not have been specifically speaking about businesses, it is a quote deserving of further thought.15

BibliographyCampbell, JL. (2007), 'WHY WOULD CORPORATIONS BEHAVE IN SOCIALLY RESPONSIBLE WAYS? AN INSTITUTIONAL THEORY OF CORPORATE SOCIAL RESPONSIBILITY', Academy Of Management Review, 32 (3) pp. 946-967, Business Source Complete, EBSCOhost, viewed 8 June 2013.Carroll, A, & Shabana, K 2010, 'The Business Case for Corporate Social Responsibility: A Review of Concepts, Research and Practice', International Journal Of Management Reviews, 12, 1, pp. 85-105, Business Source Complete, EBSCOhost, viewed 6 June 2013.Friedman, M 1970, 'The Social Responsibility of Business is to Increase its Profits', The New York Times, September 13th 1970, viewed February 10th 2011,