Social Responsibility of Business towards stakeholders - Social Environment, Business Environment Video Lecture | Business Environment - B Com

It was Milton Friedman, the famous nobel prize
winning economist, who once said 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.
Friedman's comments characterize one of two
perspectives related to business social responsibility.
On one hand we know that the primary objective
of a business is the attainment of profits.
But does that mean that profits are the only
factor that business managers should consider
when making decisions?
Before we go into greater detail on the different
perspectives related to social responsibility,
lets define the term.
Social responsibility can be defined as a
businesses obligation to make decisions that
ultimately benefit society.
The issue that I'm sure you're beginning to
realize, is how does a business engage in
actions that benefit everyone?
This is a very difficult task, however business
managers must be able to balance these competing
interests.
But lets get back to Friedman and the shareholder
model.
Friedman felt that business social responsibility
was pure and unadulterated socialism, and
even compared businesses that engage in social
responsibility efforts to government institutions.
So why is Friedman so adamantly opposed to
social responsibility?
Well there are in fact a few different reasons.
First lets take a look at how most large businesses
are structured.
For liability and financing purposes, many
large businesses are structured as C-Corporations.
Now the only thing you need to know about
C-Corporations to understand Friedman's argument
is their composition.
The key parties of C-Corporations include
shareholders, the board of directors, and
corporate officers.
The shareholders are those individuals who
invest their money in the company in exchange
for a percentage of ownership and typically
voting rights.
This makes shareholders the actual owners
of the company.
Since shareholders doesn't necessarily have
the time or expertise to make company decisions
they elect the board of directors, who appoint
corporate officers to manage the day-to-day
operations.
And since shareholders, who again are the
owners, can't make the decisions it's the
responsibility of the corporate officers to
make decisions that are in the best interests
of the shareholders.
And what is more important to shareholders
than profit?
So it is the responsibility of a corporate
executive to make as much money as possible,
while of course operating within the rules
of the game, which refers to established laws.
Now engaging in what is termed social responsibility
is in direct conflict with the shareholder
model because it diverts resources and energies
away from profit maximizing behaviors.
Take for instance giving to a charitable organization.
Friedman isn't arguing against donating to
your local church, but he is arguing that
a business is not the appropriate vehicle
to do it.
For one, finding a cause that all of its shareholders
agree with would be nothing short of a miracle.
And secondly, by spending energies and resources
on social responsibility the business is giving
up those alternatives that it may have otherwise
engaged in.
Those alternatives may produce more of a benefit
for the business.
Instead Friedman believed that businesses
should pursue profit maximization, essentially
making as much money for shareholders as possible,
and with that extra cash shareholders could
donate to whatever organization they wish.
Friedman's views of course represent just
one of the two perspectives related to social
responsibility.
The second perspective is known as the stakeholder
model, and maintains that businesses have
a responsibility to not only seek profits,
but to also satisfy the interests of multiple
stakeholders.
These stakeholders represent individuals or
groups that have an interest in the actions
and behavior of the business.
The idea behind the stakeholder model, is
that business managers need to maintain a
positive relationship with society and their
environment if they are to operate effectively.
Failure to do so can harm a businesses reputation
and ultimately affect their ability to operate.
Now since all stakeholders do not have the
same influence on an organization, we commonly
separate them into two categories: primary
stakeholders and secondary stakeholders.
Primary stakeholders represent those individuals
or groups who have a greater influence on
the organization.
They include a business's customers, employees,
investors, suppliers, government agencies,
and the local community.
These groups are of utmost importance because
the business relies on them for long-term
survival.
Think about the impact on a business if its
customers stopped buying products, or investors
withdrew their investment.
Under the stakeholder model, business managers
top priority should be satisfying the various
interests of these groups.
Although secondary stakeholders are not as
critical as primary stakeholders, they still
can influence public perception of the business.
Common secondary stakeholders include special
interest groups and the media.
These groups don't conduct business regularly
with the organization, but what they communicate
or choose to communicate can have an impact
on public perception.
Just look at the efforts that oil and gas
company British Petroleum has gone to in order
to repair its battered image in the wake of
the Deepwater Horizon oil spill.
Although the criticism was certainly warranted,
special interest groups and media played a
significant role in transmitting information
related to BP's decisions that led to the
explosion and subsequent oil spill.
Now that we've outlined both the Shareholder
and Stakeholder Models, and as we finish up
this video, I want to leave you with a parting
question.
Should business managers subscribe to the
shareholder model or stakeholder model ? Perhaps
a better question is If you were the business
manager making the decisions, which model
would you follow?
If profitability is a businesses objective
than is it wrong to make decisions with that
objective in mind?
Although you could certainly make the case
that cutting costs to boost profits in the
short-term didn't benefit BP in the long run.
So maybe acting socially responsible is less
about being socially responsible and more
about being profitable.
It could be that being socially responsible
is in fact good for business, and not pure
and unadulterated socialism as Milton Friedman
suggests.
Even if business managers only consider the
interests of stakeholders for the incentive
of profits, doesn't everyone win?
Let us know what you think in the comment
section below.
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