Ethical Viewpoint

Introduction: Corporate Social Responsibility (CSR) is always an on-going issue that companies have to cope with. What are the responsibilities that companies should take other than the maximization of return to shareholders and by taking such responsibilities, how it may affect the operation of the firms as well as how effectively such actions could have on the society. There have been two main positions on the CSR issue.

The first is the Friedmanian one stating that “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 games” (published in the book “Capitalism and Freedom”). The other view is that companies can and should deviate from the goal of maximizing profit to take others responsibilities that help to promote the total welfare of the whole society. I will first discuss these two viewpoints and give my opinions on such reasons then, finally, draw up my conclusion on CSR. Discussion of the Friedman point of view:

From the Friedman viewpoint, businessmen who seriously take the CRS such as fighting poverty, avoiding pollution… are “unwitting puppets of the intellectual forces that have been undermining the basis of a free society”. He stated that the responsibilities of a company rest mostly in hand of the sole proprietors or the corporate executives. However, while sole proprietors are individuals i. e. they can act on their own behave, for corporate executives, there are several reasons that restrict them from exercise any other responsibilities than maximizing the return to shareholders – owners of the company i. . usually maximizing the profit. The first reason is that in a private-property system, the executive is an employee of the shareholders, which means that he voluntarily and personally agrees to work under the direction and supervision of the shareholders in return for salary or other remunerations. Therefore, the executive has to commit with the shareholders’ interest, which is usually maximizing the profit. In some cases where the interest of the shareholders is not economic one than the work of executive may vary but it must be in line with the shareholders’ interest.

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This is also enhanced by law that the shareholders have the right to appoint or dismiss the executive. Therefore, if he cannot comply with the shareholders’ interest, he can be fired, which, from a personal point of view, there is no good for him to conduct CSR on behave of the company. In short, an executive of a firm, who has a huge impact on how the firm acts, is bound by the responsibility to the interest of the shareholders. This also implies that the executive cannot deploy resources that are not owned by himself to other social usages i. e. e cannot lower the price to stop inflation, he cannot make expenses for environmental practices beyond the legislation, he cannot give the earnings of the company to charity organizations. Because by doing so, he indirectly harms the interests of the owners of those resources. It seems that the CSR does not rest on the executives but rather on the owner of the company. Therefore, it may not suitable to discuss the role of the executive in conducting CSR but the decisions and interest of owners are what matter here. It is not affected whether the firm wants to conduct CSR or not but whether the owners want to take such responsibilities.

The question here is that whether each of us (as individuals) should sacrifice our personal interests for the common good. The second reason is that when firms do CSR, it violates the efficient division of labour in the society. Doing social responsibilities on behave of the company is the same as redistributing resources in the society, a process which is currently carried by taxation system. This raises political questions in two levels: principle and consequences. On the grounds of principle aspect, the taxation is done by the government.

There are structures, mechanism to determine who will be taxed, the tax level, and how the tax money should be used. The whole process is to correct market failures and make sure a fair and balanced distribution of resources for the society, in the name of the greater good. By doing CSR, the executive has taken the tax function of government. He decides to tax shareholders, employees, customers…, how much to tax (how much to spend on CSR) and how should the money is used, which makes him a civil servant, not the employee of the shareholders anymore.

For the consequences aspect, it is doubted that a single act of an executive can surely lead to a positive effect on the whole society. Such a reduction in price can really slow down the inflation (or just make the whole industry outputs decreases since other firms must lower their prices also to compete, and therefore, creates deficit for the economy). Spending too much on environmental practice beyond legislation may increase price and draw the company out of business because of competition.

Free-market mechanism works based on the assumption that “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest” (Adam Smith - The Wealth Of Nations, Book I, Chapter II, pp. 26-7, para. 12). Therefore, by deviating from self-interest, a firm who heavily does CSR may be forced out of the market. However, Friedman has left out the case of default on duty of agent i. e. what if the government cannot fulfill its responsibilities as correcting market failures and redistributing resources.

If these duties are not carried out, it then can cause harm to the whole society. We can see there is a dilemma here. If the companies take those duties, its main duty will be less efficient and cannot stand in the market. On the other hand, if it does not care about these residual duties, the whole society may go down i. e. the economic cake is shrinking. Let me summarize the reasons of the Friedmanian viewpoint on why company should not conduct CSR: 1. The binding relationship between owners and executives does not allow the executives to deviate the goal of the company from maximizing returns to owners 2.

Doing CSR is considered as taxation on shareholders or employees, or customers, which, in a democratic world, is a job of government. 3. Under the free-market mechanism, extra expenses arose from CSR can finally draw the company out of business All in all, the Friedmanian article produces a very strict and straight point the responsibility of companies: to maximize the return of owners. It makes companies seem like soulless machines designed to do nothing than maximizing owners’ interest. However, the idea is derived from the position of an executive, who does not have real power on decision making.

Moreover, this model will only work in such a condition where the government fulfills its responsibility and the model also assumes that there is only one company is doing CSR (if others do not also do CSR then unfair competition may happen). Discussion of the ethical point of view: In contrast to the viewpoint which is supported by the Friedman viewpoint presented above and the belief that CSR and profit go together that the only responsibility of companies is to maximize profit (in general) and not to do real CSR – companies may conduct CSR if it helps to increase profit i. . CSR as a tool for profit maximization, not the true goal -, there may be good reasons for firm to deviate from maximizing profit. Firstly, I will discuss on how the Friedman viewpoint is refuted and then the latter viewpoint. Counter Friedman viewpoint From the three main reasons of Friedman viewpoint above, there are counter reasons to refute them: 1. There is a contract that binds the executive responsibility to the interest of the owners: Such a contract does not simply release the involved parties from others duties to other agents i. . reduce or cancel their duties to the rest of the society. This also implied a fact that executives have a special duty to the owners, which will be discussed later 2. The effective division of labour between companies and government (“taxation aspect” as an example): There are two reasons to refute this term. First, it is not the action of the executive that should be considered in this case but whether the owners would give up some of their benefits to promote other ends i. e. efute the notion that executives doing CSR as a taxation agent. Secondly, there are cases when the government cannot or not willing to do its duty, therefore, makes the whole model of ideal division of labour collapse. On the second reason, the author gives an example of Third World countries where governments are usually fail to fulfill their duties. However, this example is not so persuasive since in such countries, not only the governments default on their duties but other agents, especially customers, do not value the CSR.

Therefore, if a company assumes to take the residuals value, it will lose its competitiveness and being drawn out of business. 3. The free-market competition does not allow firms to do CSR: it is reasoned that if customers, employers, shareholders, government value the CSR activities of the firm then CSR will not push a firm out of business but conversely, can even help the firm grow. The article also criticizes the Friedman viewpoint by refute the notion that “Firm has a special duty to its owners and it should takes preference over duties to others”.

A special duty may be formed: when agents have a certain kind of relation to each other (the relation approach) or the universalistic approach that everyone has responsibilities to everyone else, but these general duties can be carried out more effectively if each agent is assigned special duties, which it does best, towards a limited group. For the relation approach, the firm and the owners should have at least one of three kinds of traditions: voluntarist tradition, the mutual benefit tradition or the communitarian tradition.

It seems that there is a voluntary tradition existing between the firm and the owners but it does not mean that each agent can pursue their own goal at all costs since doing so, it may harm the voluntariness of other parties. Therefore, a voluntarist tradition also restricts the profit maximization. Based on the communitarian tradition, agents are partly defined by its relationships and various rights. Therefore, reducing the commitment to a group is the same as changing the agent’s personality and that special duties should only arise from relationships that are key to the agent’s identity.

Miller has created some “criteria” for such relationships: (1) they belong together, (2) their association is neither transitory nor instrumental, (3) their community has distinctive characteristic, (4) there is loyalty in the sense of willingness to sacrifice personal gain to advance in the interests of the company. The relation between the firm and owners has failed heavily on criteria (2) and (4) and therefore, it fails within the communitarian framework. However, it is worth questioning here about the criteria.

In such a fast changing world, especially the explosion of virtual world – the Internet, communities are formed, which can satisfy all of the above criteria (for example, the open source community, who develop computer programs and peer production together without cost to the public usages) but leave no or very little traits (identity) on the parties. As the grounds for mutual benefit traditions, it is true that there is a mutual benefit tradition between firm and owners.

However, it involves far more parties, who can be customers, business partners, government… Therefore, the firm’s responsibilities cannot be limited only to the owners. Nevertheless, if then, can and should the company try to satisfy all of its stakeholders. This leads us to the universalistic approach, whether the firm should have special duty towards a group (owners), which it can do most effectively. The universalistic approach is built on the assumption that agents who are assigned special duties can carry out the duties, which means that governments can effectively correct market failures and redistribute income.

In practice, this is not always the case; and when the special duties cannot be done, they become the residual responsibilities of all. And it is worth notice here that division of duties is just a tool to promote the general duties. Therefore, when the government fails to perform its duty, the company should deviate from its special duty (maximize profit) and try to cover the residual duties. However, there are 2 problems with this reasoning. First of all, how can we measure if an agent has successfully performed its duty i. e. f the government has done a good job or not? Second, the residual responsibilities are rested on the entire society, not only the business. Therefore, only when other agents also try to participate in solving the responsibilities, are the general duties fulfilled. It helps to avoid the disadvantages to companies when they do CSR as mentioned in the 3rd reason of Friedman viewpoint. Only when the customers and other companies take part in the process, does the company not face the fact of being out of business due to unfair competition.

In all of the relationship traditions mentioned above, the special duties of firm to owners has failed on some and partly fulfilled some. As a conclusion, the special duty of companies to owners is restricted by the duties to other agents and it may be changed (deviate from profit maximization) if necessary. CSR and profits do not always go together: It is shown, by practice’s investigation that CSR will not always lead to positive economic profit and there is a limit for CSR expending (to some point, the cost will be more than the benefit).

However, there seems to be a lack of time variable here in the research. For example, if the company builds 10 or 100 hospital for the city, it does not lead to much different economic profit. However, if the company continues supporting 10 hospitals for 10 years then it can create a commitment between the company and the community, which then results in customers’ loyalty. The profit from CSR should not only be measured at a fixed moment but also spread through a period of time.

All in all, the ethical point of view states that companies do not have special duty to only the owners but it must act in a way that can comprehend its other duties to different parties in the society and in order to do so, it may have to deviate from its ultimate goal i. e. maximizing profit. However, in contrast with the conditions for Friedman viewpoint, this assumption requires a condition where the government cannot fulfill its duty and other parties (competitors, customers, suppliers…) must act in the same manner as the company (deviate from their own special duties if needed). Conclusion:

Both articles provide very interesting opinions on if firms should take on CSR or not. While Friedman viewpoint, which based heavily on the assumption of private-property democracy and free-market mechanism, states that firms must only focus on one ultimate responsibility: maximize owners’ return, the ethical viewpoint states that firms must also sacrifice its own self-interest i. e. profit in order to promote other ends for the society. I agree on the assumption that executives have a special duty against the owner and that efficient division of labour should be respected in normal cases.

A company can never satisfy all the responsibilities it has towards all other parties equally or effectively. Only by dividing the general duties and assign them to subgroups, it makes sure they are done in the most effective way. Moreover, as an executive, if he or she tries to conduct CSR against the will of owners then the effect of such actions is neither material or long lasting since the owners, according to law, have the right to appoint and dismiss executives on their will.

This assumption also implies that social responsibilities do not rest on firms but rather on individuals. It is not whether firms do CSR or not but if each of the owner wants to sacrifice their own interests for the common good. CSR, at its best understanding, involve the participation of the whole society i. e. companies do not stand alone is this field and so, should not be considered solely when debating on CSR issue. Other factors such as how the government does its duty and how customers, suppliers… value the CSR have huge impact on the fact that should companies conduct CSR.

Free-market mechanism is a very strong force that as long as our society depends on it, we must comfort it. Only when the customers’ demand for such CSR value increases, does the companies do CSR. If this is not the case, companies are killing themselves. Therefore, no matter how intensive firms are on CSR issue, it will be immaterial and short-sighted if by doing so, threat the firms out of business. The debating question here is not about firms conducting CSR but about how society value CSR, which will then guide the behaviours of firms.

In conclusion, in current situation under the force of free-market mechanism, firms’ decisions are not the main forces that affect the CSR issues but how well other agents (especially government) fulfill their own duties and how society value CSR. The available solutions are that government must improve its performance (tighten the legislation, prevent corruption, protection for firms doing CSR…) and the society’s awareness of CSR value must be raised so that society will value CSR seriously (through education programs).

Only then, can firms truly perform CSR without facing the dilemma of trade-off for economic profit, which is the main reason for firms to exist. All in all, for now, I agree to the statement of Milton Friedman that “responsibility is to conduct business in accordance with their (owners) desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom”. The question is how such “basic rules” will drive the behaviours of companies.

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