The Social Responsibility of Business:A Review.

Maz DemosthenousSchool of Commerce

The Flinders University of South AustraliaGPO Box 2100

Adelaide South Australia 5001

Telephone: +61 8 82013896Facsimile: +61 8 82012644

Email: Maz.Demosthenous@flinders.edu.au

SCHOOL OF COMMERCE RESEARCH PAPER SERIES: 00-8

ISSN: 1441-3906

1

For many, the view that the main goal or purpose of business is to make as much

money as possible is accepted as a matter of fact and is beyond debate. To go

further and say that the social responsibility of a business is also just to make a profit

is open to debate. The aim of this paper is to discuss the various views of the

responsibility of business, and to consider where accounting fits in. In addition, to

explore the ethical responsibilities that a corporation may have beyond making

profits for its stockholders.

The Friedman view

Milton Friedman’s view is that in a capitalist economy, there is one and only one

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 (Friedman, 1983).

When one is looking at the responsibilities of an individual or an organisation they

must first examine their roles. The directors of companies have a fiduciary

responsibility to act in the best interest of the shareholders. The managers are agents

of the shareholders and therefore have a moral obligation to manage the firm in the

interest of the shareholders, which obviously is to make as much money as possible

and maximise shareholder wealth. The shareholders are the owners of the

organisation and therefore the profits belong to them. However, does that entitle the

directors and managers to act in an unethical manner to benefit the shareholders?

2

According to Friedman (1970), a corporate executive (manager) has a direct

responsibility to his or her employers, and that is to conduct business in accordance

with their desires, which is generally to make as much money as possible. In a

capitalist society it is rare to hear that one has gone into business for reasons other

than to make as much money as possible. The corporate executive is the agent of

the individuals who own the business and their main responsibility is to them. As

stated by Miller and Ahrens (1988), Friedman believes that corporations are a

species of private property and, consequently, that they have exactly the same social

responsibility as other businesses in a capitalist economy, that is, to make as much

money as possible so long as they stay within the rules of the game which is to say,

engages in open and free competition.

Friedman's view to managing business takes the classical perspective. This is an

approach to management that advocates allow the “invisible hand” of free market

forces, with their allocative and coordinating efficiencies in resource allocation, to

regulate business for society’s betterment and to dictate the actions of business. In

its basic formulation, it espouses that the entire social responsibility of a business

entity is to “make profits and obey the law” (Bartol et al., 1998, p131). This

approach to management contends that it creates the greatest good for the greatest

number, and therefore the government need not intervene.

3

Other Views

Advocates of utilitarianism would consider the actions of management using this

approach as ethical, because with utilitarianism, the consequences of an action are

considered to be ethical if they provide more good(or benefits) than harm(or costs).

Therefore, Utilitarian reasoning assesses actions by reference to the utility they

generate. This is further narrowed by Financial Utilitarianism whereby the actions

which generate greater financial utility (profits) are considered as better actions than

those which generate less financial utility. Cavanagh (1990) states that cost-benefit

analysis is the dominant criterion in ninety percent of all business decisions. If we

follow Friedman’s view that the social responsibility of business is to be profitable,

and furthermore, consequences are measured by costs and benefits, it appears logical

from a utilitarian perspective that the best ethical action is that which maximises

profit (Clark & Jonson 1995, p3).

Ethical egoism can also provide a basis for defending capitalist management

decisions. With this framework, if the evaluation of the consequences focuses solely

on the individual (corporation) long run interest, and the decision results in a greater

ratio of good compared with alternatives, the decision would be considered as

ethical. So increasing the profit of the corporation would be in the long run interest

of the corporation and thus would be considered as ethical.

4

Unfortunately most accounting thought implicitly applies Utilitarian reasoning.

Accounting students are taught to think that a good/successful business is one that

makes most profits. Typically, they are also taught that they discharge their

accountability via the financial statements they provide to users. But these financial

reports do not show, for example, what environmental damage has been incurred by

the business or if the decisions of management were ethical.

Accountability and Stakeholders

If Accounting is part of the public information given by a firm to “others” to justify

its behaviour (Lehman, 1995), then it can be argued that a moral obligation exist to

provide additional environmental information in published accounting reports.

Thus, accountants play an important part in making corporations more accountable,

because they can provide the relevant data so that society as a whole can evaluate

their environmental utilisation. To achieve this Gray’s concept of accountability

must be developed ie. “the right to receive information and duty to supply it” (Gray,

1990, p23). Providing environmental information is a step forward in establishing

an accountability relationship between corporations and others.

5

Gray (1990) argues that by providing this additional environmental data we can

firstly, keep organisational decision-makers informed about their use of economic

resources, and secondly inform the public about the way in which organisations are

using the resources. Accounting, by aiming to “expose, enhance and develop social

relationships” (Gray, 1992, p413) about the use of the environment by corporations,

can move beyond the 'decision-usefulness framework' to 'ethical frameworks' which

can work to constrain unjust practices at the community level (Lehman, 1995).

Critics of market capitalism assume that the particular motivations of liberal

societies, self interest and the desire for profit, must necessary lead to lack of

concern for the environment and the community at large. Gray (1992) supports this

by pointing out that the environment is in crisis and urgent solutions are needed. I

believe that if there are no strict controls on production in a liberal society such as

Australia, the natural resources will quickly be exhausted and the natural

environment will be polluted to harmless levels which can never be reversed.

6

A number of authors argue, however, that businesses should not run solely for the

interests of the stockholders. (Donaldson 1982, Miller and Ahren 1988). Rather,

businesses have a social responsibility that requires them to consider the interests of

all parties affected by the actions of the business. Management should not only

consider its stockholders (shareholders) in the decision making process but also

anyone who holds a stake in the outcome. Thus, another way to analyse the social

responsibilities of business is to consider those affected by the business decisions,

and referred to as stakeholders. Freeman (1984), defined the term stakeholders as

“any group or individual who can affect or is affected by the achievement of the

organisation’s objectives”(p46). “Examples of stakeholder groups (beyond

stockholders) are employees, suppliers, customers, creditors, competitors,

governments, and communities” (Goodpaster 1991, p53).

Stockholders (owners) have a financial interest in the business and obviously expect

a financial return. The business affects their livelihood because they need money to

live and purchase material things.

Employees have their jobs and again their livelihood to consider. In return for their

skills and labour they provide to the business they expect a salary, benefits, security

(not to be made redundant), to be treated fairly and not to be exposed to a harmful

environment.

7

Suppliers are also considered as stakeholders because the business relies on them to

provide the necessary raw materials which will determine the final product’s quality

and price. The supplier needs to be treated with respect if they are to respond to the

needs of the business appropriately and accordingly.

Customers need also to be treated as a valued member of the stakeholder network

because without them the business would not exist. They provide the revenue that is

needed for the business to achieve its main goal – to be profitable.

The community is another stakeholder because in theory the local community grants

the business the right to exist. They grant the business the right to build facilities to

operate, and they purchase the business’s products. For these and other reasons the

business should consider the community in their decision making process. They

should not pollute the environment because in effect they are exposing the

community to hazards (health hazards).

If stakeholder theory is to be used to analyse the social responsibility of

corporations, the questions that may be asked are: Is it so easy to consider all the

different stakeholders in the decision making process? And if so, is it really so

different from the Friedman philosophy of where a business’s social responsibility is

to make as much money as possible? Stakeholder theory does not give any primacy

to one stakeholder over another, so there will be times that when one group will

8

benefit at the expense of another. The problem that then arises is which group

would be given preferential treatment? Again a cost benefit analysis will have to

take place and one will have to calculate the utility of a proposed action for the

stakeholders. But taking into account of the different stakeholders would that make

those businesses more ethical? Kenneth Goodpaster (1991) made the important

point that merely identifying a group as stakeholders in some activity does not, by

itself, point towards a correct or appropriate ethical analysis of the activity. This

theory is one step forward from Liberalism (capitalism/free markets) to one of

“reform liberalism”. Liberal accountability theorists believe that in providing more

information corporations are satisfying the needs of the different stakeholders.

However, if corporations are going to take the step to becoming more considerate of

all stakeholders and responsible for their actions, they must break away from the

liberal models (instrumental reasoning) which are in place and move towards a

practical way of reasoning. Lehman (1999) stated “Practical reasoning is the type of

reasoning we use in our everyday deliberations to make moral and ethical

decisions”.

Communitarianism

Corporations (businesses) must learn to treat their management, workers, suppliers

and customers, as well as their shareholders, as members of a shared community.

This task requires the embodiment of communitarian principles in the working of

every organisation in the economy, both in the private and public sector.

9

“A communitarian wants society to bring up people with built-in moral principles

which restrain them from evildoing; the law is just a back up, to restrain anyone

whose upbringing fails to stick”(Stretton, 1994, p267). So people will need plenty

of teaching - from family, employers and school or from their daily experiences of

life if they are to think more practically and with moral principles.

“Communitarians believe that it takes a lot of history and collective action both to

develop the complex society that offers a great diversity of options, and to bring up

individuals with confident, skilful capacities to think and choose for themselves”

(Stretton, 1994, p267). When these individuals learn or decide that some things are

good and some are bad, and thereafter sees them as bad or good, their disposition to

recognise things in that way will become the individual’s character (Stretton 1994).

But by having a communitarian way of living would corporations still aim to

increase profits, or will they exist just to serve the community? What type of society

would accommodate the communitarian principles? Would communitarianism

cause the corporations to act in the public interest? As stated by Lehman (date

unknown) “a broader communitarian framework seeks to bring about social change

through informed dialogue in a public sphere; in questioning the assumption of

economic growth it is suggested that procedural liberalism could be used as a

corporate mask to perpetuate unchecked economic development that is destructive in

nature” (p 12). Communitarians worry about the tendency to reduce practical

reasoning to instrumental reasoning which is the type of reasoning used by

economists to arrive at optimal solutions at minimal costs (Taylor, 1995), and is a

10

central strand in contemporary liberal and accountability models (Lehman, date

unknown).

Conclusions

Corporations may have more than just the responsibility to increase profits, and must

consider the environment and community at large. This may require that we move

away from the greedy capitalist liberal society that we are living in, if we as a

community are to become more considerate of others. For the community at large

(including corporations) to be moral, they may require to be educated by institutions,

friends and family around them.

Corporations will need to think further or consider more than just the stockholders in

the decision making process. Stakeholder theory may be one step in the right

direction but communitarians would argue that this is just “reform liberalism”.

Communitarians critique of liberalism is that both the Friedman and stakeholder

theories are instrumental systems and therefore narrow our thinking and operate

through the notion of a corporation.

If we do head in this direction, traditional accounting may need to be reformed

through the technology of social and environmental accounting to make corporations

more accountable to the community. Environmental accounting may be essential if

corporations are to satisfy the accountability relationships with stakeholders

(corporations giving an account of its actions to stakeholders), and if it is to change

11

the consciousness of corporations. “Environmental accounting ultimately calls for

corporations to give and provide reasons for their use of the environment” (Lehman,

date unknown, p396).

12

BIBLIOGRAPHY

Bartol K, et al (1998), Management A Pacific Rim Focus, Sydney, Australia, McGraw Hill.

Beauchamp T L & Bowie N E (1996), Ethical Theory and Businesses, Fifth Edition, Prentice Hall.

Cavanagh G H (1990), American Business Values, Englewood Cliffs, NJ: Prentice Hall.

Clark G L & Jonson E P (1995), Management Ethics: Theory, Cases and Practice, Australia: Harper Educational.

Donaldson T (1982), Constructing a Social Contract for Business, in Corporations and Morality, Englewood Cliffs, NJ: Prentice Hall

Evan W E & Freeman E, A Stakeholder Theory of the Modern Corporation: Kantian Capitalism, in Beauchamp T L & Bowie E (1988), Ethical Theory and Business, Englewood Cliffs, NJ: Prentice Hall.

Freeman R E (1984), Strategic Management: A Stakeholder Approach, Boston: Pitman.

Friedman M, The Social Responsibility of Business is to Increase it Profits”, New York Times Magazine, 13 September 1970, reprinted in Donaldson T and Werhane P (1983), Ethical Issues in Business: A Philosophical Approach, 2nd Edition, Englewood Cliffs, NJ: Prentice Hall

Goodpaster K E (1991), Business Ethics and Stakeholder Analysis, Business Ethics Quarterly, 1, 53-73.

Gray R H (1990), The Greening of Accounting: The Profession After Pearce, The Chartered Association of Certified Accountants, Certified Research Report, 17.

Gray R H (1992), Accounting and Environmentalism: An Exploration of the Challenge of Gently Accounting for Accountability, Transparency and Sustainability. Accounting, Organizations and Society, 17, 399-425.

Gray R H, Owen D L & Adams C (1996), Accounting and Accountability, Prentice Hall.

13

Gray R, Dey C, Owen D, Evans R & Zadek S (1997), Struggling with the praxis of social accounting: stakeholders, accountability, audits and procedures. Accounting, Auditing and Accountability Journal, 10, 325-365.

Kant I (1990), Foundations of the Metaphysics of Morals, NY: MacMillan.

Lehman G (1995), A Legitimate Concern for Environmental Accounting, Critical Perspectives on Accounting, 6, 393-413.

Lehman G (1999), Disclosing New Worlds: Social and Environmental Accounting, forthcoming, Accounting, Organizations and Society.

Lehman G [date unknown], Disclosing New Worlds: A Role for Social and Environmental Accounting and Auditing, Adelaide: The University of South Australia, 1-42.

Miller F D & Ahrens J (1988), The Social Responsibility of Corporations in Commerce and Morality, Totowa, NJ: Rowman & Littlefield.

Stretton H and Orchard L (1994), Public Goods, Public Enterprise, Public Choice, St. Martins Press.

Taylor C (1992), The Politics of Recognition, In Gutmann A, Multiculturalism and The Politics of Recognition, Princeton University Press: Princeton, NJ, 25-75.

Taylor C (1995), Heidegger, Language and Ecology. In Dreyfus H L & Hall H, Heidegger: A Critical Reader, Blackwells: Oxford , 247-270.

14