Q

Assignment is about corporate social responsibility which includes spending shareholder's money with little incentive

Home, - Social Responsibility of Business

Introduction
Friedman in 1970 expressed his view on capitalism and freedom by stating that, "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". This view brings about the ethical question according to the ethical framework available supported by different philosophers. However, Milton Friedman introduced a guiding principle for business ethics as depicted in the New York Time article titled "The social responsibility of business is to increase profit" (Milton Friedman 1970).
The key question is whether a company's director can conduct any deal to increase organisational profits. Friedman defines directors as the agents of business who have to restrict themselves to the rules of the game, but it still leaves a room for behaving unethically. It is difficult to determine whether the management is bound when acting with the aim of increasing profits. The second issue concerns whether corporations should get involved in socially responsible activities within society. Friedman was critical of the socio-economic view of the company's social responsibility. From this view, the corporate directors cannot involve in activities that do not affect the organisation directly.
According to Friedman, there should be a direct form of capitalism that acts against any activity that hinders economic freedom (Hammond 2003). The corporate socially responsible activities according to Friedman include distorting the economic freedom as the shareholder cannot decide how to spend their money. Corporations should, therefore, focus on activities that are directly related to company's profit. This is by excluding the charitable activities that fail to generate revenue directly. This means that corporations should not be involved in supporting charitable activities such as education institutions as it is an inappropriate use of revenue in a free-enterprise society.
The corporates have to stay within the rules of the game according to the Friedman view. They should avoid fraud and deceptions. The executives in a corporate have a role to carry out the business according to the desire of the shareholders which is making more money while at the same time conforming to the society basic rules. These are found in the law and the ethical customs. With this view, it is clear that Friedman does not dictate that company executives should behave in a way that is law-abiding and ethically correct to maximise the corporate profit. Additionally, he does not support charitable activities as they do not contribute directly to the company's profit. Friedman's view is that a company does not engage in an activity because it is ethically correct but because it is economically viable. This would imply that corporate social responsibility should not a factor to increase profit as it entails ethical spending (Waldman and Siegel 2008).
The corporate social responsibility includes spending shareholder's money with little incentive to economise. This spending is mostly associate with the government through its various programs. In Friedman's view, it is against the aims of the corporate executives to spend resources on socially responsible programs as they are associated with little incentives for sensible expenditure. This is difficult as the money spent is part of the shareholders' dividends.
Corporates are morally neutral legal organisations which have the sole role of maximising the shareholder's returns as their single most priority. The corporation hires executives and directors to solely achieve this goal (Friedman, 1962). This then becomes the sole moral responsibility of the executives and directors as they try to meet the shareholder's expectations. They have to maximise their returns on investment. Friedman's view is similar to the social Darwinism theory and principle of survival of the fittest in the market with the aim of ensuring the best possible outcomes. To be fittest, the corporation then has to get the highest shareholders returns.
Friedman was presented with an example of an electric company that cut supply to a customer who failed to pay and then the customer died as a result. Friedman applied the Kantian view to justify the action of the electricity company. He argued that a company that does not cut electricity to non-paying customers then the customers would not have a reason to pay their bills. Cutting off the electricity is a form of universal maxim without considering what outcomes would be achieved. Friedman saw it as ethical in that the corporation directors have the moral duty of ensuring its survival.
When the executives carry out the corporate social responsibility, they fail to look at its viability in a competitive environment. As Friedman noted that its aim should always to maximise the profit, there lacks information on the effect of spending someone's money. The reduction of shareholders returns, increase in consumer price and lowering of employees' wage is one of the effects of applying corporate social responsibility. Friedman had the perspective that the consumer and the stakeholders could use their money for social activities if they wished to do so and the executives should not take that role.
Socio-economic perspective
It is also important to critically analyse the Friedman's view in a socio-economical perspective. The socio-economic school of corporate social responsibility is one of the proponents of the iron law of responsibility (Davis 1960). This was also promoted by Fredrick who saw social responsibility of businesspeople needed to reflect on the social power (Frederick 1960). The corporate executives and directors should oversee the operation of an economic system that meets the public expectations. It suggests that the means of the production in an economy should be implemented according to the socio-welfare benefits.
According to the socio-economic view which follows a utilitarian argument as depicted by Frederick (1960), it emphasises on the total socio-economic welfare of society. It supports its enhancement instead of concentrating on the shareholder's well-being as Friedman supported. Corporates which operate exclusively for the sake of maximising shareholder return and thus do not engage in socially responsible activities are considered unethical in the utilitarian point of view. It is the idea of the utilitarian adage to provide the most benefits for the greatest number of people (Kennett et al. 1998). Businesses are ethically supposed to engage in socially responsible activities to maximisestakeholders' total welfare. This is not the case with the standard consequentialist theories which suggest the maximising ofagent-neutral value (Kennett et al. 1998). According to the utilitarianism, there is no identified group of people whose benefits should be maximised and instead looks at how the benefits of all the stakeholders can be maximised without jeopardising the long-term business prospect. There is a deontic constraint principle that assigns a value to individual agents over others and is then applied to determine the corporate social responsibility. The shareholder's rights are protected in preference to the rights of the society at large.
Review
Friedman sees corporate social responsibility as detrimental to business. This suggests that the shareholders should avoid investing in companies that are socially responsible. However, the evidence available does not support this view. In one way, Friedman does not acknowledge that acting ethically can be one form of valuable marketing proposition to potential and existing customers. When corporates understand the desires of consumers, they can, therefore, offer services and products that are appealing to their ethical preferences. This is one of the methods of adding value to consumers and shareholders as Theodore Levitt (1960) described in the business myopia studies.
Available research shows that more consumers prefer products and services from socially responsible corporates. This was also identified by Herzberg in theory of Motivator-hygiene Theory; he identified that hygiene factors are some of the minimum conditions to meet at the workplace in order to increase satisfaction. Additionally, Meijer and Schuyt (2005) looked at the role of corporate social responsibility on the consumer purchasing behavior and found that the Dutch society looks at the corporate social responsibility regarding hygiene as a more than motivating factor. However, this was not attributed to the household income (Meijer and Schuyt 2005; 435).
Over time, the ethical investments have grown which shows that some investors prefer organisations that do not seek profit maximisation by imposing ethical constraints on their operations (Guay, Doh and Sinclair, 2004). The Motivator-Hygiene Theory is well versed and related to the shareholders.In some businesses where executives and directors behave unethically, there has been growth in shareholder dissatisfaction. Where there is misbehavior, which is against the codes of ethics, shareholders have expressed their discord and increased their fight for improved company reputation, as demonstrated by the several recent examples or corporate misbehavior (Carson 2003). On the other hand, Griffin and Mahon (1997), showed that there is no causal relationship between the shareholders' satisfaction or business performance with the level of socially responsible spending in meta-study. There is no established hypothesis on this relationship to support their influence on each other.
Friedman also proposed that the executives and directors of the corporation need to stick to the rules of the game. This is a somehow ambiguous statement as the rules are not always set by impartial referees. For instance, in the U.S., laws and regulations are legislated by a political system, and some corporates expend large amount of money to make sure that the new legislated laws favor them. This was the case in several countries in 2008 where the rules were abolished with the aim of rescuing companies whose failure was perceived as going beyond the set financial systems.
When looking at the rules of the game, it is also difficult for the government to enforce all of them. Some economies functionswhich are set within the society as norms such as how muchemployees and executives should earn, customer relationship, tax laws, community obligations and gender roles keep on changing over time and can highly impact the overall economic success of a company. Some of the corporates have also been influenced by the Friedman teachings on corporate responsibility, therefore, changing the norms associated with their operations. This shows a bias in terms of the rules of the game altogether.
Another issue which contradicts the rule of the game as proposed by Friedman regardsthe maximisation of profit, which is not always clear and readily applicable as seen. There are factors which have to be considered when increasing profit. Such is the long term and short-term goals of the company which may affect the aim of the company to increase the profit. For instance, a company may forego high profits in the short term while implementing long-term strategies which will bring more profit after a longer period. The understanding of the executive and the directors may also vary regarding what is meant by profit maximising. Economist sees increasing profit as a factor of increasing a firm's economic value although this would be different in businesses where more comprehensive metrics have to be identified and analysed.
Strategic Corporate Social Responsibility
According to Waldman and Siegel (2008), firms engage in corporate social responsible as a strategic venture. They analysed specific attributes of corporates and types of corporate social responsibility activities that they undertake to determine if they are socially responsible and if they maximise their profit. The studies showed that high-profile corporate social responsibility activities such as improving the working conditions of the employees and voluntary efforts to reduce pollution were important in firm's differentiation strategy to become more reputed in the market.
Waldman and Siegel (2008) found that using an aggregate measure of CSR involvement that firms selling experience goods and experience and credence services are more likely to engage in CSR than those selling search goods. The difference in the intensity of CSR involvement across types of goods, they argued, is explained by the consumers' perception of a firm's involvement in CSR (even when the firm's product does not directly include a social component) as a valuable signal of the firm's reliability and its commitment to quality and honesty. Different companies have a different effect on the employing corporate social responsibility which is associated with the types of product and the market it serves (Hiscox and Smyth 2006). It is upon the companies to determine the right corporate social responsibility according to the group of stakeholders they serve. Being responsible and profitability may become more acceptable in the modern business environment. The theoretical and empirical evidence supporting the strategic socially responsible activities have shown companies can increase profit, especially in private organisations. Some stakeholder value the firm's social efforts as they gain additional benefits from these activities. For instance, they help to enhance firm's reputation and the ability to generate profits by differentiating its product. They also help to attract more highly qualified personnel or the ability to extract a premium for its products.
The Friedman view has been outdated in that having a robust social responsibility programs helps to improve the overall business development of the company. Most of the investors have shown interest to purchase stocks from socially responsible companies than those which do not undertake these activities. Most investors have a feeling that they are contributing to positive change the society although the contribution is minimal. They are part of the socially responsible community which would give back to improve the society to which they operate and get profit. Corporate social responsibility has also shown to help managers pursue long-term goals compared to short-term goals. However, this type of social responsibility should not only be aimed at achieving the greatness and company reputation while neglecting the achievement of social benefit. The long-term goal of maximising the profit through corporate social responsibility is also proving to be better than conducting marketing to increase sales.
Conclusion
According to Milton Friedman, corporates should not engage in corporate social responsibility as it is part of spending shareholder's money. His view was that the expenditure did not directly contribute to maximisingshareholder profits. Friedman supported the Kantian view that directors are responsible for looking at the shareholders' interests which is always to increase their wealth. He was of the view that socially responsible activities end up reducing the wealth of the companies as they engage incharitable activities. This is the unlike the view with the socio-economic theorists where the companies are aimed at maximising the good for the greatest number of people. The two are contradicting to each other as one support companies engaging in socially responsible activities to maximises the profit of the stakeholders while the other does not support corporate social responsibility with the aim of maximising the profits of the shareholders (Pava and Krausz 1996).
Although the two arguments carry some weight, they should be considered according to the financial sustainability of the corporation. If any activity would erode deontic constraints which recognises the right of shareholders to a reasonable return, then it is not advisable to implement it. Directors do not have total freedom in maximising the profit as they are bounded by both the legal and the ethical rules of the game. Additionally, for companies to be fully ethical, then they have to engage in a reasonable level of socially responsible activities as this maximises the wealth of all stakeholders. Social responsibility should not only be seen as using the shareholder money but should be strategically implemented to meet the organisation goals which is part of maximising the shareholder's profit.
It is difficult to determine whether Milton Friedman view of corporate social responsibility is a factor to be considered by corporates management without first carrying a study on its effect. It is evident that different people have a different view regarding how they perceive the application of corporate social responsibility. With this, the shareholder perception would contribute to how the executives and the directors make the final decision. When a company fails to make more profit, shareholders may attribute this to increased expenses on the corporate social responsibility. However, where there are increased profits, this may as well be contributed to the improved reputation the company has achieved through corporate social responsibility which has increased sales and employee performance. Although the two arguments may be correct, it is upon the directors of the corporation to determine what a company needs.

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