Key characteristics of for-profit firms which create possible tensions between important stakeholder groups
As stated by Milton Friedman, businesses are primarily profit driven and, as such, seek to maximize profits and reduce costs in any way that they can. Barriers to doing so come in the form of laws that either limit particular practices (such as environmental conservation laws), outright banning particular practices (as seen in the case of laws against corporate collusion and the formation of monopolies) or implementing measures that constrain a company’s ability to produce goods at a far cheaper rate (labor laws and local tax rates). While Adam Smith states that governments should adopt a “laissez faire” (let alone) policy when it comes to mercantilism and international trade and let the market decide on the price of goods and provision of services, the fact remains that Smith never anticipated the sheer level of societal impact modern day corporations have on society and how, when given the opportunity to do so, they have the tendency to abuse their level of influence unless controlled by an outside entity (i.e. governments).
The fact of the matter is, as explained by Friedman, no matter how good the initial intentions of a company are, it is a foregone conclusion that the need to meet stakeholder expectations in the company often result in the need to eschew social responsibility in favor of making a profit. For example, in the case of GE (General Electric) under Jack Welch, he had previously emphasized the need for ethical business dealings and corporate social responsibility when it came to company operations. However, despite advocating for such practices, under his tenure at the company, it was held liable for up to 39 counts of law violations, environmentally hazardous operations as well as had a debt collection process that subjected its clients to undue harassment. The same disparity between advocated practices and actual operations can similarly be seen in the successor of Welch, Jeffrey Immelt. Immelt had similarly advocated for the integration of CSR (Corporate Social Responsibility) into all aspects of company operations. However, during his time at the company, GE received billions of dollars in corporate tax breaks in order to generate local jobs yet GE instead continued the practice of outsourcing to locations such as China.
While corporations do have the right to reduce their cost of operations it must be wondered whether the basis for this cost reduction violates certain ethical standards of doing business. For example, it can be seen in the case of China that due to the lack of environmental conservation laws companies could in effect utilize production methods that are cheaper but environmentally damaging. Furthermore, since these locations are far from prying eyes of consumers the use of sweat shops with deplorable conditions for their workers has become a rampant means of reducing costs.
Various U.S. based companies get away with such actions by stating that they were unaware of such practices since the work was contracted to another company, yet it is obvious that there is no way that they would not have known given the savings they gain from such practices. Based on the details given and the viewpoint of Friedman, it can be seen that while for-profit firms do see the logic in creating a positive public image through social responsibility, the fact remains that they still need to meet the expectations of people at Wall Street. This results in them implementing practices that cannot be considered socially responsible due to the need to meet the obligations it has towards the company’s stakeholders.
Evolution of societal expectations placed upon profit seeking firms
The concept of “the Social Contract” states that in order for society to continue to develop and maintain order, a main set of rules must be agreed upon in order to set into motion proper ethical values. In other words, a social contract can be considered a form of moral obligation that a person or group of individuals agree to in order to form the society that they currently live in. There are numerous manifestations of this which can be seen in the world today such as individuals following a distinct set of moral and ethical standards when it comes to dealing with other members of society.
In the case of businesses, this comes in the form of adhering to a certain moral code involving the way in which they provide goods and services to their consumers or deal with other businesses within the same industry (Karnani, 105-111). The application of this moral code takes the form of Corporate Social Responsibility (CSR) which is the application of internal self-regulating practices by a business to ensure that it follows a distinct set of ethical standards, business norms and laws. What must be understood is that businesses are primarily profit driven; this can be seen in the case of Carroll’s pyramid wherein economic responsibilities form the base of the pyramid which are the primary focus of all businesses today (Karnani, 105-111). Thus, when it comes to the importance businesses place on the concept of CSR, it can be seen that in the business decision matrix they consider it to be of lesser value than the need to be profitable.
This method of thinking has given rise to numerous ethically dubious practices ranging from environmental damaging processes of production, overconsumption of natural resources such as fish and trees, the use of sweat shops, and finally various practices such as corporate collusion and the creation of monopolies in order to better control the options of consumers. It is based on this that it must be questioned how the social contract can be implemented on corporations in light of their morally ambiguous actions in the present.
Highlight practical pros and cons of firms proactively working to be socially responsible
For Porter and Kramer, it is actually impossible for any individual (or in this case a corporation) to act or make a decision against its own interest (i.e. constrain its activities due to CSR) (Porter and Kramer, 56-69). For example, a corporation could choose to be socially responsible by keeping its manufacturing facilities in the U.S. instead of outsourcing them to China. By doing so, it builds up local good will and is shown to be a socially responsible corporate entity (Porter and Kramer, 56-69). However, if its rivals offshore their facilities to China, they are thus able to utilize the cheaper labor force and lax environmental codes to implement production processes that are environmentally damaging as well as pay their workers incredibly small salaries.
The end result is that they are able to produce a much cheaper product as compared to the company that did not offshore its production processes. At the end of the day, it is more likely that when presented with a cheaper and more affordable option of products with the same quality, it is likely that customers would logically choose the more affordable of the two (Nuryaman, 113-124). This is one of the reasons why attempting social responsibility simply does not mesh well with trying to be competitive and making a profit in today’s globalized society where consumers are after affordability more so than the means by which a product has been made (Nuryaman, 113-124).
Alternatives available to firm executives regarding how they evaluate & prioritize among competing stakeholder demands
What must be understood is that while corporations have a moral obligation to society due to corporate citizenship the fact remains that when given a choice between following proper CSR or the company failing and going bankrupt as a result most corporations choose to pursue actions of moral or ethical ambiguity. This was seen in the case of the Union Carbide plant wherein competition from other companies caused it to be lax in implementing proper safety standards resulting in an eventual industrial accident that claimed the lives of 16,000 people. It is not that corporations are not aware of their obligation towards society but rather what must be understood is that corporations will often pursue a strategy for survival first then the application of ethical practices later.
This manifests itself in the decision to pursue an act of self interest in order to maximize the utility that can be derived from the consumption or use of a particular resource (Grossman, 572-596). Alternatives do exist though wherein stakeholder demands often help to influence the operational agenda of the company. For instance, the “green movement” in the U.S. and its subsequent impact on consumers and investors alike has resulted in an upsurge in both stakeholders demanding that companies focus on environmentally sustainable means of production. It is due to this that despite the loss in profitability, corporations try to appeal to such segments by changing its production processes to more sustainable albeit more expensive processes. Taking this into consideration, evaluation and prioritization of stakeholder demands by firm executives is based on whether they perceive their stakeholders wishing to focus on ethical production practices (i.e. green production) or pure profit.
Opinion regarding how firms should respond to calls to be more socially responsible.
Due to the competitive nature of companies, as seen from the perspective of Friedman, it becomes harder to implement CSR as corporations struggle to make profits in an economy where morally ambiguous corporate actions result in differing price ratios which are not in favor of a company that is not willing to pursue alternative actions of possible moral ambiguity. From the perspective of Carroll, corporations have a certain “obligation” towards society in the form of corporate citizenship. This is the application of the social contract through an adherence towards moral and ethical behavior that benefits society since this in turn would cause better business practices to flourish. On the other hand, as it can be seen in the case of Friedman, it is often doubtful whether individual corporations are capable of applying corporate citizenship into their business models.
It can be seen in the case examples within this paper that there have already been numerous moral and ethical violations committed by corporations. The only way to resolve such issues is to implement a way of collective responsibility that corporations would feel towards society. Corporations can only be made to agree to conform to the social responsibility if collective responsibility is applied so as to remove the competitive nature of corporations that compel them to pursue morally dubious practices in order to stay relevant and profitable (Grossman, 572-596). By doing so, a collective response can be created to enable socially responsible actions that promote the wellbeing of society.
Works Cited
Grossman, Hugh Alexander. “Refining The Role Of The Corporation: The Impact Of Corporate Social Responsibility On Shareholder Primacy Theory.” Deakin Law Review 10.2 (2005): 572-596. Print.
Karnani, Aneel. “CSR Stuck In A Logical Trap.” California Management Review 53.2 (2011): 105-111. Print.
Nuryaman, Ranjeet. “The effect of corporate social responsibility activities on profitability and stock price (Studies On The Companies Listed On Indonesia Stock Exchange).” Journal Of Global Management 6.1 (2013): 113-124. Print.
Porter, Michael E., and Mark R. Kramer. “The Competitive Advantage Of Corporate Philanthropy.” Harvard Business Review 80.12 (2002): 56-69. Print.