CSR Benefits: Organization and External Shareholders

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Table of Contents

Introduction
CSR’s positive impact on External Stakeholders
The Case against CSR benefitting External Stakeholders
Conclusion
References

Introduction

Corporate social responsibility is a practice that provides more benefits to the organization in comparison to external stakeholders. There are scholars who oppose this argument and believe that CSR actually benefits the external stakeholders more. I will first present two arguments supporting the ideology that CSR benefits the external stakeholders. I will then show why these arguments are hollow and weak.

I will also outline four arguments that prove that the practice of CSR only benefits the organization in the long-run. First of all I will theoretically show that CSR has become a public relation issue. CSR causes managers to feel that they are ethical and accountable yet it may not be true.

In addition, when it comes to CSR it is the corporate that has all the power to determine which stakeholder to consider and if they choose an external stakeholder, it is only because they will maximise their profits. The other argument presents a very profound question. Which entity should be concerned about social responsibility? Should it be the government or the entity?

Lastly, why should we task the corporate with a broad implementation of CSR? I will give the reasons why it should not be so drawing from the writings of Milton Friedman.

I will also highlight the feasible expectations that the society should have on the corporates as they conduct business to avoid the public feeling short changed. There are feasible restrictions placed on the corporate as they conduct business which Milton Friedman clearly highlighted.

CSR’s positive impact on External Stakeholders

Milton Friedman proposed in one of his writings that the focus of the company managers should be to make profits for their bosses who are the shareholders. However, there are those who argue that he was wrong since as time has passed companies have embraced corporate responsibility. The managers have other goals apart from profit-making such as increasing social welfare (Bejou, 2011).

CSR causes the company to be compassionate towards its external shareholders. Compassion encompasses certain values such as integrity and actions in support of human rights, animal rights, environmental sustainability and freedom.

It also causes one to get involved in actions against global ills such as poverty and diseases. There are particular companies that have earned the reputation of being compassionate companies and researchers have highlighted the efforts that the companies have taken around the world.

These include companies such as Pepsi, Ford, Aeropostale Inc. and Target. Ford Company is involved in providing support to food banks throughout the world through their Food pantry Project. Their employees also volunteer their man hours and in 2009, it was noted that they had volunteered 100,000 hours which is equivalent to $2 million.

Pepsi is a company involved in assisting families that have been caught up in various disasters such as the earthquake in Haiti, the wildfires in Australia and the hurricanes in Central America and Mexico.

Aeropostale Inc. has also been a compassionate company in providing gifts to children in hospitals, donating clothes to the homeless and assisting the victims of the Haiti earthquake. The Target Company on the other hand demonstrates compassion in giving 5% of its income to local communities in form of cash, in-kind donations and volunteer hours.

Secondly, there have been many researchers who have criticized the Friedman article titled ‘The social responsibility of business is to increase profits’. They feel that he was against the broad view of CSR. It is argued that Milton’s view supported quite a narrow view of CSR (Schwartz and Saiia, 2012).

The firm should be constrained by a broad view of CSR which includes ethical considerations that were not considered by Friedman.

These broader values include utilitarianism where the firm considers the net good of all the stakeholders even though it will not give the maximum profit to the firm. There is also Kantianism where one is supposed to put himself or herself in another person’s shoes when making decisions and taking certain actions.

It is argued that the broad view should be adopted since organizations are powerful entities which can make great positive impact in the society (Post, 2003). A research case study was carried out to analyse the broad and narrow application of CSR. The Ford Pinto and Merck and River Blindness incidents were the areas of focus.

The Ford Motor Company realized there was a design flow in the manufacture of its Ford Pinto and had to recall the car from the market. The researcher argues that Friedman would have advised the company not to recall the car since it was quite a costly exercise and the car had conformed to the safety regulations at that time. However, the broader CSR view caused the company to recall the vehicle.

The researcher also highlights the Merck and Co. management which decided to invest in a new drug that would cure river blindness yet the economical profits from the venture were quite low and uncertain.

The Case against CSR benefitting External Stakeholders

In analysing the arguments mentioned above, it is important to first point out how hollow the arguments are. CSR efforts should not be confused with ethical responsibility of managers. The world has faced global recession where many people have lost their

jobs and homes due to the greed of senior managers yet all these companies were heavily involved in the compassionate activities outlined. Companies adopt CSR activities in order to portray themselves as compassionate and endear themselves to the public. Secondly, it is important to remember that the Ford Company only recalled the vehicles from the market after intense pressure from the public.

They only did so after seven years. 27 people died during the period. In the case of Merck and Co, it is possible that the company knew the indirect financial benefits that would accrue by engaging in such a philanthropic act and this should not in any way prove that firms do not think of profits in all their actions.

I will outline several arguments that show CSR only benefits the organization. First of all, people are more concerned with the business of ethics rather than the ethics of business. In many businesses there are ethical officers and departments. There are many books in print that highlight business ethics and business ethics is a heavily researched area in different education institutions.

When the ethical structures fail, the public blames greedy individual behaviour, the over-regulating government or the combination of business and politics. People rarely analyse the problem in a holistic way in order to provide a viable solution (Neimark, 1995). Ethics in business and especially CSR has just become a public relations issue. It would have been better for efforts to be geared in training individuals to have ethics instead of CSR.

The objective of corporate social responsibility is hardly achieved since the allure of being viewed publicly as social responsible may cause managers to think they are practising social responsibility yet their actions speak otherwise.

In a research study conducted in an Australian Company, PackCo, the researchers investigated whether the CSR policies helped managers to behave in an ethical and accountable manner. It is hard for managers to act ethically since in the aggressive pursuit of profit actions are taken on the expense of others. The researchers interviewed managers in the different levels of management, environmental and accounting departments.

Information was collected on the respondent’s opinions, values and impressions concerning the company’s social responsibility. Social responsibility was practiced in relation to the effect of the company’s activities on the environment. Managers had targets on minimising waste such as diesel and electricity.

At the same time, the company was involved in recycling used packages, reconditioning them and using them again in selling products to the clients.

The management thought that they have a social and ethical identity since they participated in these practices. A survey on the employees however showed that they were displeased with the working conditions such as recognition, fair treatment from managers and the state of the site amenities. The chairman wanted to restrict the results and not give them to senior management.

Some of the managers did not like the employees’ comments. The study showed that senior managers in getting involved in social responsibility may feel morally and ethically righteous causing them to refuse to address the real issues in the company (Baker and Roberts, 2011).

They do not want to be questioned as they feel they are doing enough. It emerged that social responsibility was benefiting the organization’s managers and owners only and not the external stakeholders or the employees.

As managers practiced environmental policies, they were interested in cutting costs at the detriment of the working conditions of employees as they pursued profit. In the organization itself senior management and owners of the company benefit the most from CSR as employees may not get any benefit at all.

My second argument shows that the corporate is a powerful entity that determines which stakeholders it should consider. While defining corporate responsibility, there has been the use of terms such as obligations. However, the question is, who determines the obligations of a business to its external stakeholders and to what extent can the external stakeholders impose sanctions on a business when they engage in “illegitimate activities”?

In analysing the social responsibility practices of firms, the firm focuses on pleasing the stakeholders who would have an influence over the financial or competitive position of the firm. There are therefore stakeholders who are marginalized since they do not influence the profitability of the firm positively (Bannerjee, 2008).

CSR is viewed as a competitive strategy. One should not think that the interests of the external shareholders are the primal basis for the firm’s actions. In companies that have slick annual reports on social responsibility, there are high employee lay-offs yet the CEO salaries keep increasing. It is really all about cutting costs and making profits. The CSR actions will be taken only if they affect the bottom line positively.

It is expected that the company will think beyond profits, will be ethical and transparent and get involved in actions to spur social welfare however this is a difficult task considering the inherent characteristic of a corporation to aggressively pursue profits.

Big corporations that have caused environmental havoc especially in the Developing world have not gone out of business. As much as they have had to alter their policies

and practices, these actions were voluntary and the public cannot really enforce such actions. Just because a company practices social responsibility does not mean that they are ethically responsible or accountable.

Enron, a company that was rocked by scandals was voted as the best company to work in and the most innovative company. Another example is the unequal relationship between mining multinationals and indigenous people. If asked, the people would want the companies to leave however all the mining companies do is hire anthropologists to investigate how they can expand their activities.

There is a question one should ponder, if the corporate institutions are not really able to increase the social welfare through their business efforts, which entity then should be tasked with this responsibility? It should be the government of the country. It should provide an environment where there is balance. The disadvantaged or less powerful in society should be protected by laws that are entrenched in the constitution.

The government however has not been able to address its responsibilities well. They have become caught up in creating conditions that are conducive for economic growth for the corporates (Roberts, 2003).

The truth of the matter is that the economic structure in a capitalist society encourages the aggressive pursuit of profit at the expense of others. It was wrongly assumed that self-interest behaviour combined with market competition would greatly protect the interests of interests of the public.

It is out of this gap that there has been quite a high level of interest in investigating the powers of corporate institutions and forcing them to care for the society all in the name of corporate social responsibility. The public wants corporations to now take on the role of government and ensure that there is increase of social welfare.

If an organization is involved in actions that impact the environment, it is okay to expect them to be involved in waste management and recycling efforts. However, there are areas which are beyond the scope of the organization. It is admirable if the company chooses to engage in such activities however having such high expectations will eventually lead to disorientation when it emerges that it was all a sham.

The media has helped the public in pushing corporate investors to address ethical concerns and corporates only bow in fear of bad publicity but it is not because they want to do it.

The non-governmental institutions have joined the media in making demands on corporates and with the tools of video cameras and the internet companies are caught between a rock and a hard place. There are even certain companies which have become proactive to release stakeholder reports with the aim of avoiding the bad publicity.

Milton Friedman did not support the call for corporate social responsibility and he outlined several reasons supporting his arguments. At the end of the day, a corporate is set up by the owners of the business to maximise profit.

To engage in social responsibility and not regard the costs involved or the profit margin is indeed a violation of trust since the manager acts as the agent of the shareholders. There are costs that a business incurs every time it engages in corporate social responsibility.

These costs can be considered as taxes on the shareholders especially where the company gets involved in charitable events. It is very hard for a business manager at times to anticipate the negative and positive effects of the company actions.

Secondly as he imposes the costs of social welfare he will definitely lose the support of the shareholders. There is also the risk that a manager may engage in corporate social responsibility initiatives on his own without consultation with the owners or other stakeholders (Coelho and Spry, 2003).

Certain individuals decide which CSR efforts to endorse. No wonder then CSR has simply become PR since these managers also have their own selfish interests. I therefore agree with Milton that the proponents of CSR are proposing socialist actions yet the businesses are operating in a capitalist market system.

There are arguments that even if social impacts of business are unknown, this cannot be an excuse for the company not to engage in CSR (Mulligan, 1986). The businesses engage in new product and market campaigns despite the fact that there is a lot of uncertainty. However, there are estimation parameters that can be applied in predicting business events that may not be used in estimating social events.

The second argument is that CSR cannot be termed as socialist even though Friedman argues that the business manager ceases to be an entrepreneur and gets a political role where he is obligated to the society. The firm deals with scarce resources yet there are numerous needs in the society.

Politicians are charged with the task of allocating scarce resources in society. CSR therefore turns the business man into a politician. It is argued that in a capitalist society, the political sphere is laced with individuals who are only

concerned about their self-interest therefore CSR is not socialist. Considering this argument, then businesses should not attempt socialist actions at all in the capitalist market structure where there are no rigid controls.

It is argued that Milton Friedman’s essay paper showed that he only supported legal restrictions on the enterprise and not moral or ethical restrictions. The fact of the matter is that the law keeps being amended every few years as technology advances and other changes occur in the market place.

By using the law, he wanted to give the business men a definite yard stick to work with rather than giving people an ambiguous yard stick that entails changing moral or ethical implications. He therefore did not intend for businesses to disregard the interests of others.

It is worthwhile to also note that as much as he recognised the self-interest of business men he did not expect them to act in a selfish manner. Self-interest and selfishness should not be confused to mean the same thing (Cosans, 2009).

Every human being is a rational being, looking out for their self-interest while purchasing items in the market place however it does not mean that every human being is a selfish individual. Researchers who have also read other works by Friedman have highlighted that his arguments were incorrectly analysed by different researchers.

He recognized that we live in an interdependent society so business should obey the rule of the law. They should also not act in deception or fraud. It is argued that he set a low ethical bar or that his view of CSR was narrow however his intention was not to act in such a manner.

There is no need to set such high bars of ethical obligations yet the companies will face great dilemmas in trying to implement the acceptable forms of behaviour. It is also important to note that Friedman said that generally the desire of shareholders is to maximise profit. He acknowledges that there are situations where due to other

considerations the aim of the management is not to maximise profit. In such instances, if the manager continues with his role as an agent he will do exactly what the shareholder desires.

In light of the development of CSR and the recent corporate scandals, it is evident that Milton understood the politics of business and the propensity of business to gravitate towards profit-making at the expense of others. Friedman was not against CSR since he argued that the business in pleasing the owners should take care not to commit fraud or deception. He therefore placed limits on the firm in their pursuit of maximization of profits.

That is truly the best CSR approach and not just engaging in charity events yet there are frauds happening in the organization. Those companies that are viewed as having attained high levels of social responsibility still disappoint society since sooner or later it comes out that they were a fraud.

Conclusion

The essay proves that indeed corporate social responsibility does not really benefit the society but the organization. It was expected that it would benefit external stakeholders however the nature of the market system and organizational entity makes it not possible. The company has been set up by individuals who are interested in making profits.

The shareholders and managers act like rational beings just like everyone else. The imposition of CSR has made managers engage in public theatrics where they portray themselves as ethical yet their actions speak otherwise.

It is better to place reasonable limits on the business rather than put unrealistic expectations causing the public to be disillusioned or disappointed. The task of increasing social welfare should be a role of the government since corporates are set up to make profit for the owner of the company.

References

Baker, M and Roberts, J. 2011. ‘All in the Mind? Ethical Identity and the Allure of Corporate Responsibility’, Journal of Business Ethics, vol. 101, no. 1, pp 5-15.

Bannerjee, S. B. 2008. ‘Corporate Social Responsibility: The Good, the Bad and the Ugly’, Critical Sociology, vol. 34, no. 1, pp 51-79.

Bejou, D. 2011. ‘Compassion as the New Philosophy of Business’, Journal of Relationship Marketing, vol. 10, pp 1-6.

Coelho, M. and Spry, J. 2003. ‘The Social Responsibility of Corporate Management: A Classic Critique’, American Journal of Business, vol. 18, no. 1, pp. 15-24.

Cosans, C. 2009. ‘Does Milton Friedman Support a Vigorous Business Ethics?’ Journal of Business Ethics, vol. 87, no. 1, pp 391-399.

Mulligan, T. 1986. ‘A Critique of Milton Friedman’s Essay “The Social Responsibility of Business Is to Increase Its Profits”’, Journal of Business Ethics, vol. 5, no. 4, pp 265-269.

Neimark, M.K. 1995. ‘The selling of ethics: The ethics of business meets the business of ethics’, Accounting, Auditing & Accountability Journal, vol. 8, no. 3, pp 81-96.

Post, F. 2003. ‘A Response to “The Social Responsibility of Corporate Management: A Classical Critique’, American Journal of Business, vol. 18, no. 1, pp. 25-35.

Roberts, J. 2003. ‘The Manufacture of Corporate Social Responsibility: Constructing Corporate Sensibility’, Organization, vol. 10, no. 2, pp 249-265.

Schwartz, M. S and Saiia, D. 2012. ‘Should Firms Go “Beyond Profits”? Milton Friedman versus Broad CSR’. Business and Society Review, vol. 117, no.1, pp 1-31.

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