Do corporations have a responsibility to conduct their affairs ethically and to be judged by the same standards as individuals? Should a business be concerned with more than the pursuit of profits for its shareholders? Social responsibility is the duty a company has to conduct its affairs ethically in a manner that benefits both employees and the larger society. There are both benefits and costs associated with acting in a socially responsible manner.
The Benefits of Social Responsibility
Caring for the natural environment is one of several dimensions of social responsibility that must be considered in the allocation of a firm’s resources. Companies that pollute the air, water, and land must consider the rights of people in the community to breathe clean air and drink clean water and must pay to help clean up the pollution or face government penalties. Companies spend billions of dollars each year in order to comply with laws that protect the environment.
Social responsibility ultimately leads to improved odds of long-term survival for the organ-ization. A narrow focus on producing goods and services for profit only, without considering the ramifications of company activities, may impair company performance in the long run and result in a failure to survive. In fact, social responsibility can have a positive effect on company TABLE 3.2 The Corruption Perceptions Index 2009
Least Corrupt Countries Most Corrupt Countries
Country Score Ranking Country Score Ranking
New Zealand 9.4 1 Haiti 1.8 168
Denmark 9.3 2 Iran 1.8 168
Singapore 9.2 3 Turkmenistan 1.8 168
Sweden 9.2 3 Uzbekistan 1.7 174
Switzerland 9.0 5 Chad 1.6 175
Finland 8.9 6 Iraq 1.5 176
Netherlands 8.9 6 Sudan 1.5 176
Australia 8.7 8 Myanmar 1.4 178
Canada 8.7 8 Afghanistan 1.3 179
Iceland 8.7 8 Somalia 1.1 180
United States 7.5 19
Source: Reprinted from “The Corruption Perception Index.” Copyright © 2009 Transparency International:
The global coalition against corruption. Reprinted with permission. For more information, visit http://www.
transparency.org.
social responsibility
The belief that corporations have a responsibility to conduct their affairs ethically to benefit both employees and the larger society.
performance. Research indicates that it is related to higher financial performance and the ability to recruit better quality job applicants.18
Some recent examples of the problems that corporations have faced as a result of failing to address social responsibility include the following:
1. In 1999 the courts determined that tobacco companies had purposefully withheld from the public knowledge that nicotine in tobacco is an addictive drug. Phillip Morris, R. J. Reynolds, and other large U.S. tobacco manufacturers agreed to pay $246 billion over a period of 25 years to compensate victims of lung cancer and other fatal illnesses related to cigarette smoking.19
2. Merck, a giant pharmaceutical firm, suddenly recalled its blockbuster arthritis drug Vioxx from the market in 2004,
with the release of new evidence that the drug raises the risk of heart attacks and strokes.
This news immediately cut Merck’s share price in half, lopping $30 billion off the value of the world’s fourth-largest drug company The lawsuits stemming from Vioxx users alleging harm from the product are estimated to range from a few billion dollars to as much as $20 billion.20
3. In 1989 the Exxon Valdez spilled 11 million gallons of oil and polluted 2,600 miles of shoreline along Alaska’s Prince William Sound. Environmentalists, consumers, and local businesses mobilized and forced Exxon to pay $3 billion in damages and for the
cleanup.21
4. In 2010 Toyota announced a massive recall of 8 million of its cars due to mechanical failures linked to 51 deaths in the United States, tarnishing its reputation for engineering excellence. Automotive experts believe that runaway acceleration was causing the crashes that might be linked to aggressive cost cutting pressures on the Toyota manufacturing process.22
5. Executives at Enron, a Houston-based energy company, approved risky financial invest-ments with company resources in off-balance-sheet financial deals that lost billions of dollars. When these losses were disclosed in 2001, Enron stock suddenly collapsed. The stock lost 99 percent of its value within a few months, putting the company into bank-ruptcy, and forcing the layoff of thousands of employees as the company struggled to survive the scandal that followed. The lack of transparency of the financial dealings of Enron meant that the company did not give an important stakeholder group, shareholders, the opportunity to know about how funds were invested.23
As these examples indicate, actions by such stakeholder groups as environmentalists, con-sumers, and the government may threaten the stability and existence of a company. When the management team takes the interests of key stakeholders into consideration, the threat of deal-ing with hostile interest groups is reduced. When a company’s executives adopt a socially responsible approach that is aligned with the goals of an important stakeholder group, the stake-holder may reciprocate and influence its members to patronize the products of the company. For example, Anheuser-Busch, the largest brewer of beer, has worked hard to cultivate positive labor relations with its unionized workforce, an important stakeholder group. In return, the unions have encouraged their membership to drink Budweiser and Busch brands of beer made by Anheuser-Busch, rather than consume the beer of companies that treat unions harshly.
The Costs of Social Responsibility
There are essentially two aspects of being socially responsible. The first is avoiding illegal and unethical activities, such as discrimination, sexual harassment, pollution, and tax evasion. These negative activities should be avoided as part of the ethical structure of a company. Other activi-ties associated with social responsibility have costs, because the company spends money to sup-port a social good, such as a neighborhood cleanup program, giving money to the United Way, and other beneficial activities.
The wing of an oil contaminated bird caused by the Exxon Valdez oil spill in Alaska. Chris Wilkins/
AFP/Getty Images.
In these circumstances, social responsibility may be viewed by some as counter to the ethics of individualism, which suggest that individuals and companies should be able to pursue their own self-interests. Economist Milton Friedman argues that most managers do not own the businesses they operate and should act in the best interests of the stockholders, who are primarily inter-ested in financial returns. Corporations should deploy resources to produce goods and services as efficiently as possible. Socially responsible firms that are less efficient may be driven out of busi-ness by more efficient competitors willing to singlemindedly pursue profits. These profit-maximizing firms are able to charge lower prices because social costs are not added to the cost of pro-duction.
Firms that give profits a low priority are more likely to fail and become a detriment to society because jobs and stockhold-ers’ investments are lost. In the late 1990s, when Levi Strauss lost market share to competitors Lee and Wrangler and profits decreased, some shareholders blamed the company’s CEO, Robert Haas, for giving too high a priority to corporate social responsibility.24
A U.S. firm that has let social responsibility dominate its business strategy in a way that dis-tracted management’s attention from earning profits is Ben & Jerry’s Ice Cream. Management Close-Up 3.1 discusses some of the factors that have resulted in reduced profits for this company.
Rather than making social responsibility the top priority or ignoring it altogether, management should give corporate social responsibility a high priority without neglecting other important pri-orities, such as competing successfully in its markets. A thriving organization will have resources to support its social responsibility goals, while a failing organization is too involved in trying to survive and meet its basic business obligations. The challenge for managers is to strike a balance that responds to the concerns of both stakeholders and the general society, bearing in mind that responsible behavior is linked to long-term survival.
The benefits and costs of corporate social responsibility are summarized in Table 3.3. As Table 3.3 suggests, in most cases the advantages of working toward the realization of corporate social responsibility goals outweigh the possible disadvantages.
Ethos Water, a bottled water company recently purchased by Starbucks, donates 5 cents for every
$1.80 bottle purchased to
$250,000 from its sales to such efforts; its five-year goal is to raise and donate
$10 million. The Earth to use up 1.5 million barrels of oil a year. But Jonathan Greenblatt, one of Ethos’s founders, says the company’s pitch appeals to those with a social conscience who ask,
“How do I do more?”
Is selling bottled water for a worthy cause an efficient way to be socially
responsible?
TABLE 3.3 Benefits and Costs of Corporate Social Responsibility Social Responsibility Benefits Social Responsibility Costs 1. Socially responsible companies are good
corporate citizens to the community and to the environment.
2. Socially responsible company policies can enhance the image of a company as well as its product brands from the perspective of the consumers.
3. Socially responsible companies have fewer conflicts with stakeholder groups who disagree with the company over how it uses its
resources.
4. Socially responsible companies are more likely to influence stakeholders to become loyal customers and become advocates of the company’s products.
5. Research shows that corporate social responsi-bility is related to higher financial performance and the ability to recruit better quality job applicants.
1. Socially responsible companies may lose focus on the business goals while focusing on goals related to good corporate citizenship.
2. Socially responsible companies may divert needed resources for improving the business into social responsibility projects, which could put a company at a competitive disadvantage.