Should firms accept responsibilities to all of its stakeholders?
Businesses are run by directors which are elected to their posts by shareholders - the owners of the concern. Directors formulate corporate level objectives then appoint middle managers to formulate narrower objectives for each department. All specific tasks undertaken within the business can therefore be traced back to the corporate level - to the directors - who are acting on behalf of the owners of the company. Thus, directors are responsible for the consequences of a business’s actions, and are accountable to the shareholders. Any rational shareholder will aspire to maximise profits in order to maximise personal return from their financial involvement. So it is logical to draw the conclusion that every action a business takes is in the interest of maximising profits.
This view has been undoubtedly adopted as consensus by entrepreneurs throughout history when forming a commercial organisation. However, in the modern era (post Industrial Revolution) some firms have at least on the surface begun to take a different stance toward their operations. They have essentially begun looking past bottom line profits and towards society as a whole as a matter of responsibility. One of the earliest examples of such a change in corporate attitude was that of Henry Ford, founder of the Ford Motor Company in 1903 in partnership with the Dodge brothers.
Ford was revolutionary in his approach to business. During the years of the First World War, he started to pay $5 a day wages, more than double the market rate. And on the retail side, Ford slashed its prices from $900 to $440 in 1916, with Ford himself stating “I do not believe we should make awful profits on our cars”. These strategies obviously show concern for society and to some extent brought extra private benefits along with it - namely the best mechanics in America flocked to Ford due to their extremely generous pay packets. The cut price Model-T was a huge marketing success in a growing market for automobiles in America and fuelled further growth of one of the USA’s most successful companies.
However, some of these strategies were perceived as going too far by investors, namely the Dodge brothers, who in 1913 broke away from Ford and would begin to finance their own brand using the dividends made from their original Ford investment. But, it was decided by Ford that these dividends would be diverted to further price cuts. Enraged, Dodge took Ford to court and won, with the judge stating “a business cannot be run for the merely incidental benefit of shareholders and for the primary purpose of benefiting others”. So the question remains - do (or can) businesses genuinely act socially responsibly? Is this legal? Is this even a moral thing to do?
Milton Friedman, one of the most respected pro-capitalist economists voiced his opinion that “new moralism in business is in fact immoral”. In his article in the New York Times (1970), Friedman states that it is not moral for firms to spend shareholders money on social responsibility unless it is shown to benefit bottom line profits. Peter Drucker, another highly respected business guru, went as far as to say “if you find an executive who wants to take on social responsibilities, fire him fast!” But are these opinions seen as cynical and old-fashioned in the 21st century?
There are two modern day examples of corporate social responsibility (CSR) in action that I will use. One of them is implicit and one of them is explicit. One results in success, the other ultimately results in failure. They are the cases of Pfizer and The Body Shop.
Pfizer is the world’s largest pharmaceutical company, and was formed in Williamsburg, Brooklyn. Today it still has an industrial plant there, and an example is made of how a large business presence can benefit the community around it without making a fuss. Tom Kline, the company’s senior vice president put the first ideas into practice when he was mugged in a subway near the plant. Pfizer therefore installed a security system monitored by guards on their payroll for the subway system. The company has also helped to set up a school in the local area and lends employees to the education system. This is implicit CSR put into practice. The company appears to be doing good deeds, but with no noise about how responsible it is - there are private benefits to be gained, and these probably take priority, but the company is nonetheless doing good, so does it really matter what their reasons are?
Philanthropy may be seen separately from CSR, and may be bordering on illegal if it is not justified to shareholders. Pfizer donates millions of dollars worth of medicine to Africa each year. They justify this by stating the marginal cost of the product is so low that giving it away will not affect profits (compliance with the law). Furthermore, these actions generate large amounts of goodwill (extra private benefit). And finally, these actions benefit society by improving world health (positive externality - the third priority in this case). So the actual benefit to society could be seen as merely a pleasant side effect of normal trading/marketing activities, and therefore, the motivation behind these actions are still profit-motivated. On the other hand, some corporations are founded on principles other than making & retaining profit.
When Anita Roddick started her company, her emphasis was on ethical practice (such as a stance against animal testing on her cosmetics) and to some extent, charitable giving. However, for the company to grow, she needed to float it on the Stock Exchange, which happened in 1986. This did not bode well for Roddick, who quickly came under pressure from shareholders to change the business’ strategy. In the mid-90s, the management of Body Shop was overhauled to promote performance and efficiency. The company was seen to swallow its founder when it refused to allow Roddick to support anti-globalisation protestors against the WTO. She stated that floating the Body Shop was “a pact with the Devil”. Under her authority, conflicting opinions caused the company’s value to slide and it was put up for sale in the new millennium. After a failed takeover by Mexico’s Omnilife, the company was reorganised again and Roddick was reduced to a part time consultant. New CEO Adrian Bellamy stated after this “We believe in social responsibility but we are very hard nosed about profit”. In 2006 the company was eventually bought by L’Oréal.
This case is a perfect example of how genuine social responsibility will conflict with the desire for commercial progress. As soon as Roddick floated the company, she had millions of shareholders to answer to, all of whom wanted to make quick money on their investments. Thus, the pressure for the company to grow became too great, and some of Roddick’s business stances would have to be capped. The Body Shop is very different from Pfizer in that (even now to some extent) it outwardly expresses its social responsibility as a Unique Selling Point. Yet, in the current era as part of a massive conglomerate, the firm takes profits as its priority – it has essentially outgrown Roddick’s original vision of it.
So, is it true that when a socially responsible company reaches a certain size it becomes “two-faced”? There are two examples of companies whose products are seen as producing negative externalities. To cover for this, they adopt a socially responsible stance and comply to industry regulations – especially through marketing. They are Shell and BAT (British American Tobacco). They could both be accused of hypocrisy due to their sheer size.
Recently, Royal Dutch Shell has had a very successful advertising campaign, with the emphasis on their environmental programs run by geologists under their employment. They use the superficial responsible stance as a marketing differential. In the oil industry, there is particular competition about this, with BP (formerly under Lord Browne) relying even moreso on their far sighted environmental vision. Internally however, the company has been lambasted with complaints, lawsuits and controversy over environmental and human rights breaches at their drilling sites and gas pipelines. Even BP has been accused of (and even allowed to) excessively pollute the immediate environment through oil spills and the disposal of waste into US lakes. This is a far cry from what the customer sees on a television advert.
British American Tobacco is in an industry where even more intervention, regulation and bad publicity exists. The company is forced to promote cessation campaigns to limit the sales of its own products, and comply with strict marketing rules. It has also funded the setup of the International Centre for Corporate Social Responsibility at Nottingham University. Yet again though, it has been accused of breaches (of human rights) for acquiring operations in Burma.
So using these examples together with the failure of Body Shop and the relative success of the introverted Pfizer, what can we conclude about the patterns of CSR across different firms? It could be interpreted that breaches of social responsibility are diseconomies of scale and drawbacks of company growth. This can be explained by linking company growth to pressure from shareholders which brings us back to our original point. A large company can appear socially responsible on the outside as a marketing ploy, but in reality – due to difficulties in co-ordinating and controlling large companies – breaches of responsibility are much more likely to happen.
Thus, can this question even apply to modern corporations? Is it even possible to consider every single stakeholder? Surely opportunity costs prevent such harmonisation. A company has so many decisions to make every day that it is bound to neglect something. The reality is, a business has priorities, and the most important things need to be taken care of first. As explained before, genuine benefits to society are pleasant side effects of day to day trading, and therefore they take no priority unless they aid the bottom line. So to answer the question on whether firms should or should not is irrelevant, a corporation is legally obliged to do the most for its shareholders, and therefore every decision (about other stakeholders) will and therefore should be traced back to this.