Corporations Are Only Accountable to Shareholders. They Do Not Have Social Responsibilities. Essay

Corporations are only accountable to shareholders. They do not have social responsibilities. Corporations are only accountable to shareholders. They do not have social responsibilities. Before commencement on making my stand in this topic, a clear definition of the aspects of this topic is essential. Firstly, a corporation can be define as a legal entity or structure created under authority of the laws of a state, consisting of a person or group of persons who become shareholders (All business 2010). Also, a corporation has the right to sue and be sued, own and sell property, and enters into contracts using its name (Velasquez 2006).

The next definition is to define shareholders. ‘The simplest definition of a shareholder seems straightforward enough: an individual, institution, firm, or other entity that owns shares in a company’ (Mallin 2007, p. 49). Lastly, we define social responsibilities. The corporate social responsibility (CSR) refers to the general belief held by growing numbers of citizens that modern business have responsibilities to society that extend beyond their obligations to the shareholders or investors in the firm (Wood 2007, p. 122).

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It implies that negative business impacts on people and society should be acknowledged and corrected if at all possible (Post, Lawrence & Weber 1999). Rephrasing the topic, it basically means that a corporation is only answerable to its shareholders and they are not responsible for all the actions they take in order to achieve the corporation’s goal. I do not agree to this statement. Corporations not only own their duties to the shareholders, a corporation also should be answerable to others like the stakeholders for example.

Although shareholder’s interests are the top of the corporate agenda, stakeholder interests should not be ignored as well (Mallin 2007). In short, corporations should have social responsibilities towards their actions. Following up this essay, I will discuss further on the social responsibilities a corporation should adopt and backing up my points using different theories and real life examples. Milton Friedman theory We all know that when u set up a business, the main objective is to make a profit. This is beyond debate and is accepted as a matter of fact.

This view is closely closing link to the classical CSR theory of Nobel Prize –winning economist Milton Friedman in the 1970s. In his theory, Friedman has argued that the only social responsibility and purpose of a corporation is to maximize shareholder profits (Beauchamp & Bowie 2004). One of Friedman main argument against CSR is that business executives do not have the rights to further social interests by spending shareholders’, customers’ or employees’ money (Graduate School of Business Course Notes 2010, Lecture 5).

It simply means that ‘if corporations are required to engage in corporate philanthropy, eg. Making a donation to a charity, school or hospital, these acts will distort allocative efficiency, i. e. the profitability with which capital is employed’ (Fisher & Lovell 2009, p. 311). Friedman also held another argument that ‘only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but “business” as a whole cannot be said to have responsibilities’ (Friedman 1970, p. 2).

Therefore, it is the business executives that should have the responsibilities to conduct the business in accordance with the desires of the owners of the business, the shareholders and 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 (Graduate School of Business Course Notes 2010, Lecture 5). The topic of this essay is essentially supporting Friedman’s classical theory in CSR. As mentioned in the introduction, I do not agree to this theory.

This classical view has invited much criticism on the grounds that this view justifies anything that will lead to the maximization of profits including acting immorally or illegally (Beauchamp & Bowie 2004). The main problem with the classical view is ethical issues. I felt that this approach does not stand up to scrutiny when judged against notions of justice, fairness, wisdom and care (Fisher & Lovell 2009). Many of Friedman’s followers have argued for tactics that strike many as unethical.

These unethical tactics include using deceptive advertising, flavoring strong industry lobbying and many more (Beauchamp & Bowie 2004). This can lead to immoral management. ‘In immoral management, management decisions and actions depict a positive and active opposition to what is considered ethical’ (Carroll 2001, p. 367). Due to all the criticism, ironically it has led us to a situation of increased demand for CSR (Wood 2007). Archie B. Carroll theory Due to a modern and more globalize world, the classical view is no longer appropriate in the society.

Corporations nowadays have clearly started to adopt CSR. ‘As a result of media pressure, major disaster, and sometimes governmental regulation, corporations realized that propping up oppressive regimes, being implicated in human rights violations, polluting the environment, or misinforming and deliberately harming their customers were practices that had to be reconsidered if they want to survive in society a the end of the twentieth century. ’ (Crane, Matten & Spence 2008, p. 3). Corporate social responsibility was conceptualized by Carroll (1979) as ‘the social responsibility of business encompasses the economic, legal, ethical and discretionary expectations that society has of organizations at a given point in time’ (Mallin 2007, p. 108). In Carroll’s pyramid model of CSR, he conceptualized that there are four category of CSR that a corporation owns. The first level at the bottom of the pyramid is economic responsibility, which is to produce goods and services in a profitable manner. The first level basically agrees to the theory of Friedman that the corporation obligation is to earn profit for shareholders.

However, Carroll brings the theory further by saying there are more levels of social responsibilities that a corporations owns their duty to (Crane, Matten & Spence 2008). The next level in the pyramid is to have legal responsibilities, which is obey the law and to fulfill their legal obligations. The third level is to have ethical responsibilities, which is to engage in ethical behaviors and be responsive to their ethical responsibility. The last level is to have philanthropy responsibilities, which is to promote human welfare and goodwill voluntary (Carroll 1998).

However it is noted that failure to be philanthropic is not considered unethical. R. Edward Freeman Stakeholder theory There is growing empirical evidence to suggest that an increasing number of organizations is adopting more inclusive perspectives into their ways of working that deny an exclusive shareholder focus to their decision (Fisher & Lovell 2009). This simply means that corporations nowadays not only make decision just based on the interest of the shareholders, but corporations also consider the interest of their stakeholders. This leads to the stakeholder theory of Freeman.

Stake refers to an interest or share in an effort or undertaking, a claim or a right to something. Stakeholder refers to an individual or group who has a stake in what the organization does or how it performs (Freeman 2008). ‘Stakeholder theory is a managerial theory about business. It asserts that business can be understood as a set of relationships among groups which have a stake in the activities of that business’ (Moosa 2007, p 434). This theory has been conceptualized in the 1960s but Freeman refine the concept in 1984 into a full fledge theory of strategic management.

Freeman explains that corporations ought to be operated for the benefit of all those who have a stake in them. The unit of analysis of stakeholder theory is the organization not the individual manager (Graduate School of Business Course Notes 2010, Lecture 5). ‘It is evident that stakeholder theory is a core element of the definition of CSR. In the 1980s, the stakeholder concept was conceived by Freeman to complement and support the concept of CSR’ (Yam, LHS and Ismail 2009). Freeman (2008) distinguish that there are two senses of stakeholders.

The primary stakeholders include those groups who are vital to the survival and success of the corporation. Primary stakeholders include shareholders, employees, customers, communities, financiers, suppliers etc. On the other side, secondary stakeholders include any group or individual who can affect or is affected by the corporation. They include the government, competitors, media, special interest groups, consumer advocate groups etc (Beauchamp & Bowie 2004). In stakeholder theory, organizations are responsible to their primary stakeholders and must deliver the best possible return or value to them.

At the same time, organizations should not neglect their obligations to secondary stakeholders even though they are not legally obligated (De George 1999). In my own view, it can be said that primary stakeholders have more direct relationship and the secondary stakeholders is less directly related to the corporation. The executives of the corporation will have to take into considerations of all the different stakeholders when making decisions, making sure to try to avoid any clash of interests to different groups. Where stakeholder interests conflict, the executive must find a way to rethink the problems so that these interests can go together, so that even more value can be created for each. If tradeoffs have to be made, as often happens in the real world, then the executives must figure out how to make the tradeoffs, and immediately begin improving the tradeoffs for all sides. Managing for stakeholders is about creating as much value as possible for stakeholders, without resorting to tradeoff. ’ (Freeman 2008, p. 45). One example of a stakeholder is the environmental groups.

Environmental groups seek to ensure that companies operate to both national and international environmental standards (Graduate School of Business Course Notes 2010, Lecture 5). International council of toy industries (ICTI) is an environmental group that promotes toy safety, quality standards and safe working conditions in toy factories. It has adopted a code of business practice to govern working conditions in toy factories. It has also an approved list of audit firm to carry out audit and certification of supplier factories. With the involvement of the ICTI, corporations in the toy industry will have to comply with their standards.

The corporation is therefore obligated to have social responsibilities. This is only one of the stakeholder in which the corporation are answerable to. In my own view, gone are the days where corporation are only accountable solely to the shareholders. In this modern era, stakeholder theory has taken precedence over Friedman’s theory. Corporations failing to adopt the stakeholder theory will not be able to survive. ‘Companies that demonstrate they are engaging in practices that satisfy and go beyond regulatory compliance requirements are being given less scrutiny and more free rein by both national and local government entities’ (Chong 2009). The stakeholder theory can be, and has been, presented and used in a number of ways that are quite distinct and involve very different methodologies, types of evidence, and criteria of appraisal’ (Donaldson & Preston 1995, p. 70). There are 4 different perspectives in which a corporation can adopt. The descriptive perspective describes corporations as a combination of interconnected interest groups. Instrumental perspective is in conjunction with descriptive/empirical data where available, is used to identify the connections, or lack of connections, between stakeholder management and the achievement of traditional corporate objectives.

Managerial perspectives can be use to enable managers to identify options and solutions (Donaldson & Preston 1995). The last perspective, the normative stakeholder theory addresses morals and values as a central feature of managing organizations. It examines the ends of corporate activity and the means of achieving those ends (Philips, Freeman & wick 2003). In summary, three theories were mentioned in this essay. They are the Friedman theory, Carroll theory and the Freeman stakeholder theory. In short, Friedman did not support the idea of CSR.

Carroll and Freeman had a different view against Friedman. They suggest and pointed out many corporate social responsibilities in which a corporations own their duties to. My stand in this essay has been clear from the start. I support Carroll and freeman. I defend the view that corporations are full-fledged moral agent. They need to be morally responsible for their actions and they have moral duties which are not reducible to the duties of individual human beings (Carson 1994). In recent decades, public awareness of corporate social responsibility (CSR) continues to increase.

Because of CSR, many companies today uses ‘triple bottom-line reporting’ – economic profit, social and environmental reporting. Today’s consumers expect businesses to go beyond their profit agenda, and be socially responsible (Yam, LHS and Ismail 2009). The Singtel group is a good example of a corporate committed to being a responsible corporate citizen. Not only did Singtel collaborate with associates on CSR projects, they are constantly looking for ways implement and improve policies and programmes in four key areas, community, workplace, environments and marketplace (Chong 2009).

They recognizes the fact that a company’s CSR and social involvement may improve its ability to continue doing business and help thwart challenges from powerful stakeholders in the environment. To conclude, I believe that CSR will continue to be as important as ever and more social responsibilities will be piling up for the corporation. The challenge for the future corporation, will definitely be sustaining the CSR journey. Word count: 2184 Reference 1. All Business 2010, The definition of a Corporation, All business, San Francisco, viewed 1st January 2010, . Beauchamp, TL & Bowie, NE 2004 ‘The purpose of the Corporation’, in Beauchamp, TL & Bowie, NE (eds. ), Ethical Theory and business, 7th edition, Pearson, New Jersey, pp. 45-87. 3. Carroll, AB 1998, ‘The four faces of corporate citizenship’, Business and Society Review, v. 100, n. 1, pp. 1-7. 4. Carroll AB 2001, ‘Models of management morality for the new millennium’, Business Ethics Quarterly, v. 11, n. 2, pp. 365-71. 5. Carson, TL 1994, ‘Corporate moral agency: A case from the literature’, Journal of Business Ethics, vol. 13, pp. 55-6. 6. Crane, A, Matten, D & Spence, LJ 2009, Corporate Social responsibility: readings and cases in a global context, Routledge, New York. 7. Chong, M 2009, ‘Going beyond Compliance, gaining global trust’, in Wong, S(ed. ) CSR for sustainability and success, Fabulous printers, Singapore, pp. 217-253. 8. De George, RT 1999, Business Ethics, 5th edn, Prentice Hall, New Jersey 9. Donaldson, T & Preston, LE 1995, ‘The stakeholder theory of the corporation: Concepts, evidence and implications’, Academy of Management Review, vol. 2, no. 1, pp. 65-91. 10. Fisher, C & Lovell, A 2009, Business Ethics and Values: Individual, Corporate and International Perspectives, Prentice Hall, Harlow, England. 11. Freeman, ER 2008, ‘Managing for stakeholders’, in T Donaldson & P Werhane (eds), Ethical issues for Business, Pearson Prentice Hall, Upper Saddle River, pp. 39-53. 12. Friedman, M 2007, ‘The social responsibility of business is to increase its profits’, in WC Zimmerli, M Holzinger & K Richter (eds), Corporate Ethics and Corporate Governance, Springer Berlin, pp. 73-8. 13. Graduate School of Business, 2010, Ethnics and Governance course notes from BUSM3119, ‘Lecture 5 – Corporate Social Responsibility (CSR)’, RMIT University, Melbourne. 14. Hanani, AD 2006, ‘Indonesian business groups: crisis and restructuring’, in SJ Chang (ed. ), Business groups in East Asia: financial crisis, restructuring, and new growth, Oxford University Press, New York, pp. 179 – 204. 15. Mallin, CA 2007, Corporate Governance, 2nd edn, Oxford university Press, Oxford. 16.

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