Social Responsibility and the Morality of Profits

Social Responsibility and the Morality of Profits- Swinton W. Hudson, Jr.

About the Author

Swinton W. Hudson, Jr. is a graduate of Midlands Technical College where he received his A. B. in Business, and Liberty University, where he received his B. S. in Business Management and an M. A. in Human Services with a specialization in Business Management. Mr. Hudson has served in leadership roles in Information Technology and Human Resources for the Federal government. Mr. Hudson currently serves as Adjunct Faculty Online at the Ken Blanchard College of Business at Grand Canyon University.

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The argument within this paper is whether Corporate Social Responsibility and the Morality of Profits can or should be adhered to and applied within any business venture. The theoretical concepts and application of social  responsibility and the potential positive and negative affects on profits is addressed, as well as which may be more advantageous to a business and why. The reader should draw a conclusion as to the effects of Corporate Social Responsibility and understand the potential factors affecting profitability and the stakeholders.

Although the question of social responsibility and subjugating the responsibility to obtain profits for a company is not new, it is still one that is debated within corporations, as well as in business schools.  Consequently, is ignoring corporate social responsibility while ensuring stockholder's return on their investment ethical when it is at the expense of stakeholders?

The entire concept of what entails social responsibility within a company has been debated and is vague in its constitution as to who it affects. Thus, the conclusions drawn from this paper will be based on both theoretical concepts and opinions articulated by business professionals and academic faculty. 

Stakeholders

Understanding the social responsibility of a company is necessary to identify the stakeholders who are affected by the development and implementation of a social responsibility program. Stakeholders are individuals who may be directly benefited or damaged by the actions and ethics of a company (Jones & George, 2006). Stakeholders then may be internal and external to the company, as well as the stockholders. Stockholders own stock within the company and expect a return on their investment. Managers are another stakeholder within the company and are vital to the overall success of the company because they are responsible for managing the financial aspects of the company and the human resources which can increase or decrease the performance of the company, affect the market share, profits and return on investments (Jones & George, 2006).

Managers, supervisors, executives of the company and senior corporate decision makers are all internal stakeholders. In addition, employees are all internal stakeholders. The external stakeholders which may be harmed or benefited from social responsibility of a company are consumers, vendors, the community, other businesses, the economics of an area, the environment and government agencies (Lombardo, 2009). Therefore, the decision to develop and implement a corporate social responsibility program and the ethical management by the leadership of a company can be beneficial or detrimental to both internal and external stakeholders.

Corporate Social Responsibility

According to Lombardo (2009), "CSR has no single commonly accepted definition. The concept is a fuzzy one with unclear boundaries. It generally refers to business practices based on ethical values, with respect for people, communities, and the environment" (p.305). Longenecker, Moore, Petty and Palich (2006) contend CSR encompasses varying degrees of conscientious and trustworthy actions of ethical obligations to customers, employees and the community. The meaning could be condensed to a concise articulation of treating customers and employees fairly. In respect to the community this may be interpreted as environmentalism, minority contracting, economic development, volunteering in community events, philanthropy or any peripheral social issue.

Jones and George (2006) argue that social responsibility revolves around the ethics of any organization. The internal stakeholders act ethically internally and externally to protect the reputation of the company and earn a profit for the stockholders. In addition, the organization's ethics revolve around societal, occupational and individual ethical standards and values. Godkin and Valentine (2009) stated "business leaders should consider using social performance as a mechanism for creating a corporate environment that encourages ethical reasoning, and that further complements the strategic role of human resource ethics" (p. 61).

Theoretical Concepts
Shareholder Perspective

Friedman believed that "there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits" (Friedman, 1970). He contends that executives and managers of a business are responsible to the stockholders and that social responsibility is an individual desire. As such, the shareholder model asserts executives and managers of any business are agents for the organization and do not have the authority to expend money for social responsibility. The model consists of corporate governance which is the oversight of top management by a board of directors (Schermerhorn, 2010).

Friedman (1970) also stated that in practice the principle of social responsibility is quite often a mask for actions that are justified on other grounds rather than a reason for those actions. His argument was that the cloak of corporate charitable contributions was a public relations ploy by the stockholders to increase their corporation's desirability for attracting customers, employees and community support, as well as reducing corporate taxes. This may be true, but would not the stakeholders benefit from the benevolence of the corporation? The long-term goal is to increase the market share of the business and increase profits. Good public relations and reputation is good strategic planning to increase the business' bottom-line which is profits.

Although, it is difficult for one to agree that CSR is a mask as stated by Freidman, Godfrey, Hatch and Hansen (2010) contend from their empirical study that the results of CSR have both tangible and intangible effects on the corporation. They believe CSR manifests in improved reputation, brand equity, better employee relations and the overall quality of management which are drivers for financial return. Kacperczyk (2009) contends that current trends have led to shareholders diverting attention and powers away from managers who use corporate resources to pursue their interests to include social programs. Thus, shareholders have the power of voting on disbursement of resources. In addition, the requirement of terms on boards by executives tends to minimize the power gained by managers and executives.

Fairfax (2011) supports what she terms as a changing in the landscape. With the SEC new rulings and provisions as well as the Enron and AIG scandals, the power of boards, executives and managers has been stripped by required proxy voting, recommendations of board members by shareholders and staggered boards. Fairfax stated in her article, "This change has a significant impact on shareholders' ability to influence corporate affairs. Indeed, the concentration of institutional ownership has the potential to overcome the collective-action problems posed by the traditional pool of dispersed retail investors. As a result, that ownership enhances institutional investors' ability to communicate with the board and with one another, thereby enhancing their potential ability to influence corporate affairs. To be sure, other factors may limit this ability. Nevertheless, the rise of the institutional investor opens the door for shareholders to engage in greater activism and ultimately exercise greater power over the corporation" (p. 21).

Stakeholder Perspective

The assertion of Longenecker, Moore, Petty and Palich (2006) is that social responsibility is the price a business pays to operate independently in a free economy. This price is their contributions to the community in the form of tax revenue, charitable contributions, supporting community schools, the arts, and local programs. "They usually benefit from increased goodwill as a result" (Longeneckeret al, 2006, p. 33). Schermerhorn (2010) asserts that a commitment to social responsibility by a corporation will double the bottom line of financial performance and social impact and in some instances the bottom line of economic, social and environmental performance is tripled (Brynes, 2007; Porter & Kramer, 2006). Hypothetically, good stewards of resources, and efficient and effective management results in increased profits.

Chang's (2010) study indicates and supports the argument presented by Longenecker, Moore, Petty, Palich and Schermerhorn. More credence is developed when Chang (2010) stated:

Firms face a trade-off between socialresponsibility and financial performance due to increased costs from socially responsible actions which place them at an economic disadvantage compared to other firms with less social responsibility. A contrasting view is that the explicit costs of corporate social responsibility are minimal, and that firms may actually benefit from socially responsible actions in terms of employee morale and productivity andthe cost of such actions may be offset bya reduction in other costs (p. 94).

Although he indicated that further research and study are needed to substantiate the theoretical concepts, he proposed that a CSR program would enhance corporate financial performance, create a competitive advantage, and is a strategic investment with potential long-term sustainable advantages. He contends corporations with a productive and proactive CSR program are better equipped to select, plan, and manage to sustain competitiveness.

On the subject of the stakeholder model, Sainthouse (2009) contends that according to this model, shareholders, afforded sole importance by Friedman, are just one group of stakeholders whose interests corporate management must consider and address. Increasing profits is just one of many different interests that must be considered. The interests and potential impact of shareholders on the future of the company may be very obvious, but the other groups can also have influence in different ways. An organization that damages the local environment can in turn suffer from a lack of goodwill in the local community, and employee morale will in turn be damaged; each factor ultimately affecting the company. Consequently, some of the present-day theorists and organizations reject the theory as proposed by Friedman to include Sainhouse. The contention is that organizations have to maintain a balance of social awareness, responsibilities, and duty while maximizing profits. The model for stakeholders encompasses not only stockholders, but managers, employees, consumers, the community, suppliers, the economy and the environment. Dobos (2010) subscribes to the libertarianism philosophy, whereas public opinion is a primary factor to social responsibility by companies. Thus, it is hypothesized that factors such as company size, public profile, and brand exposure and visibility are key determinants of the level of managerial awareness of and responsiveness to public opinion. This result is a balance of earning profits, profitability, and social responsibility.

Atherton, Blodgett, and Atherton (2011) state, "We propose that adherence to a new understanding and rule of fiduciary principles goes hand in hand with CSR and profit maximization and is perhaps the missing link in today's corporate governance" (p. 13). Thus, the participation in CSR and maintaining a positive trust will result in profit maximization.
Thomas M. Jones (1980) contends that "Corporate social responsibility is the notion that corporations have an obligation to constituent groups in society other than stockholders and beyond that prescribed by law and union contract. Two facets of this definition are critical. First, the obligation must be voluntarily adopted; behavior influenced by the coercive forces of law or union contract is not voluntary. Second, the obligation is a broad one, extending beyond the traditional duty to shareholders to other societal groups such as customers, employees, suppliers, and neighboring communities" (p. 59-60). Thus, businesses should demonstrate citizenship in the community. Their contributions show community support and they usually benefit from increased goodwill as a result.

Individual Ethical Behavior

The ethics of any business is the foundation of corporate social responsibility. Jones and George (2006) stated that "a company's ethics are the result of differences in societal, organizational, occupational, and individual ethics. In turn, a company's ethics determine its stance or position on social responsibility" (p. 134). ethics are associated with CSR and there is a need for professional codes that institutionalize business ethics and CSR. In addition, professional codes should therefore "be developed to represent the moral views of the public' and enforced to enhance individual behavior and prevent future misconduct" (Valentine & Fleischman, 2008, p. 663). The study conducted by Valentine and Godkin (2009) revealed that there were implications for managers. The participation in CSR revealed the emergence of the importance of ethics. The ethical ingredient precipitated the institutional process and managers were encouraged to utilize resources for CSR efforts. Therefore, a CSR program should facilitate an organization's efforts to assist stakeholders and build an ethical environment which encourages ethical decision making.

Conclusion

Is ignoring corporate social responsibility while ensuring stockholder's return on their investment ethical when it is at the expense of stakeholders? One may conclude ignoring CSR and focusing entirely on the return on the investment is neither good business practice nor morally correct. Lantos (2002) contends the legitimacy of CSR is based on the model of ethical, altruistic, and strategic and each may stand independently or in cohesion. Thus, his premise is CSR must be ethical and moral and goes beyond fulfilling legal and economical obligations. As such firms must avoid inflicting harm upon stakeholders while ensuring a reasonable return on the investment of stockholders. Thus, social responsibility is good business sense and to focus entirely upon profitability is detrimental to internal and external stakeholders. The key is a balance between CSR and return on the investment, which benefits both stockholders and stakeholders.
Although there are numerous schools of thought on whether Corporate Social Responsible programs affect profits, return on investments, market share or competitiveness, all contributing factors must be considered which may affect any one organization. Overall, according to the study conducted by Statman and Glushkov (2009), they stated "generally higher returns of stocks of companies with high social responsibility scores are especially evident in a long-short portfolio of top-overall and bottomoverall companies" (p. 39).  The management of a social responsibility program within the corporate structure as stated by Ubius and Alas (2009) is to "tame the dragon". The results are balance of community support while maximizing profits but not at the expense of stakeholders.
A corporate social responsibility program is part of the business strategy. Gilbert (1986) in his Corporate Strategy and Ethics document suggested that the strategy of a corporation resembles the 10 commandments. As such, number six is choose your economic and social contributions and number seven is values of top management should be reflected in strategy statements. Again, there are agreements as to the effect of CSR on profits. Although Ubius and Alas (2009) found empirical evidence for each, they listed more evidence which indicated a positive correlation between CSR and profits or profitability. They indicated that Grave found a positive relationship between a company's social performance and its financial performance and they contend Orlitzky claims there was empirical evidence supporting it.
Freidman's concept in 1970 was the exact opposite of David Rockefeller (Cross, 1974). Freidman's theoretical concepts may have been justified and applicable to most corporations in 1970, but Rockefeller's opinion of CSR and morality of profit gains was innovative, based on experience and futuristic vision. Rockefeller felt that CSR and profits had to be a delicate balance. On one hand, you have a responsibility to stockholders, borrowers, employees and the investment community. On the other hand, you have a responsibility to support the community with social programs, equal opportunity and compliance with federal regulations. In the case of philanthropy, the balance must be one of contributions without adversely affecting profits.
Although we realize the bottom-line is profits, current trends and shift of shareholder power has resulted in both the shareholder and stakeholder receiving benefits. Kacperczyk's study (2009) reveals the interests of both the shareholder and stakeholder can complement and coincide within the same environment. The CEOs expanded attention to institutional stakeholders, such as the community and environment that are directly connected to the public corporation, can be beneficial to shareholders. "The study further finds that firms that expand their attention to include institutional stakeholders experience higher shareholder value in the long run" (Kacperczyk, 2009, p. 280).

Our business ventures are now global. With globalism came the changes in CSR and profits as was specified by Freidman. For a corporation to sustain, be competitive and maintain a reasonable profit share on the stockholder's investment, social responsibility is necessary. Of course, being social responsible is commendable, but not at the expense of losing investors. Corporate Social Responsibility is just that, responsible. It is responsibility to the stockholders and stakeholders. It is responsibility to comply with laws and maintain ethical standards. It is also responsibility to earn a legitimate and reasonable profit, but not at the expense of the stakeholders.

Author Biography

Swinton W. Hudson, Jr. is a graduate of Midlands Technical College where he received his A. B. in Business, and Liberty University, where he received his B. S. in Business Management and an M. A. in Human Services with a specialization in Business Management.  He holds certifications in Arbitration and Mediation and is an Equal Employment Opportunity Practitioner.   Mr. Hudson was a manager in Information Technology and Human Resources for the Federal Government prior to his retirement in 2009.  Currently he is the Human Resources Director for Governor's Office of Executive Policy and Programs.   His awards include Phi Theta Kappa National Honor Society, The NAACP Roy Wilkins Renown Service Award, Department of the Army Equal Opportunity Adviser of the Year Award, Outstanding Alumni Award (Midlands Technical College) and the Kentucky Colonel Award.  He may be contacted at shudson0715@gmail.com or shudson02@my.gcu.edu.

 

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