Corporate Social Responsibility - Milton Friedman - Coursework Example

Name: Instructor: Course: Date: Corporate Social Responsibility There exist major wrangles in the world of business between the corporate and the stakeholders. Various approaches of improving the relationship between businesses and stakeholders have been suggested but none the less, the stalemate still continues. How can businesses fulfill their duties of social responsibilities? Whose interest should corporate give more consideration? That of stakeholders or shareholders? These are questions that offer challenge to the corporate. My thesis is that I can revive the notion of managerial capitalism by replacing the concept that managers have an obligation to stockholders with the opinion that managers owe a fiduciary relationship to stakeholders. In doing this I will examine and analyze the arguments put forward by Milton Friedman in his book, “The Social Responsibility of Business Is to Increase Its Profit”; Edward Freeman in his book, “A Stakeholder Theory of the Modern Corporation,” and Joseph Heath, “Business Ethics Without Stakeholders” According to Milton Friedman, the social responsibility of any business enterprise is to increase its profit. It surprises him that some businessmen praise themselves through offering employment, avoiding pollution, eliminating discrimination yet they do this in order to show solidarity with the society but their main aim is maximizing on their profits. He argues that only individuals can be responsible and not businesses. The corporate only fulfills the wishes of the management which requires them to make more money for the business owners. Every corporate has the duty to exercise social responsibility towards its stakeholders. An organization ought to treat any individual or group that influences its operations as a stakeholder. The notion that companies only interest is to maximize their profits should be treated as a thing of the past. In the recent times we have seen corporate being a core element in facilitating changes within the industry they operate in. Organizations’ have stood on a common goal regarding the production of quality products that do not threat human life. Exercising care in the products they produce is itself a social responsibility. In such a situation the stakeholders who include the consumers rely on good faith that what they purchase is good for their health. This is one type of a fiduciary relationship. We as consumers have no alternative but to trust that the products and services we purchase from firms are of good quality. Friedman had made a critical analysis of what goes through the minds of corporate owners in the pretense of social responsibility. The relationship between the executive corporate and stockholders is a fiduciary one. The managers are agents to the stockholders who are actually the owners of an organization. It’s the duty of managers to manage resources entrusted upon them with due care. The interest of a firm is to make profits but this should not let them forsake the interest of stakeholders especially those people who have allowed them to operate in that locality and any other who has interest on the operations of the firm. Should the fiduciary relationship between the managers and shareholders extend to other parties? Take an example of the firm’s employees, aren’t they legitimate stakeholders? Actually they are but what relationship exists between them and the management? Is it not a fiduciary one or is it an obligation? What about between the corporate and the suppliers? In the light of this I believe corporate responsibility should be extended to other stakeholders rather than on shareholders alone. We have seen big companies putting measures to curb environmental degradation yet they are the major contributors through air pollution and release of effluents into the rivers. Despite this, they help in tree planting initiatives, in case of emergencies such as flooding or earthquakes, social funding of schools and public amenities etc. Friedman argues that in doing all this, the corporate executive will be spending someone else’s money. When they fund a general social interest they reduce on the earnings of either the stockholders or their customers. I support this point as corporate will lower the amount earned per share in order to market itself through social activities. On the other hand, a corporate will increase the price of its commodities (goods or services) in order to fund a social interest project. The role of any business is to make profit and not to give charity, therefore, what a corporate does is to transfer funds from one stakeholder to the other. In the process it allocates funds to social projects that require first priority. In case of an individual proprietor the situation is different. If he/she decides to reduce the returns of his business in order to exercise his "social responsibility," he/she will be spending his own finances, not someone else's. If he wishes to spend his money on social responsibility, that is his right, and I see no objection to him doing so. However, in the process, he, too, may impose extra costs on his employees and customers. But despite this, he is far less likely compared to a large corporation or union to have monopolistic power, any effects will tend to be minor. The pressure to exercise social responsibility in modern day business environment has been intense. The enacted of laws that regulate the operations of a firm have made it even tougher. Firms have opted to align their marketing strategies with those of social responsibility. Engaging in social projects has become a form of marketing oneself. The popularity gained by companies through giving back to the community, engaging the locals in sports, funding schools, hospitals and government projects has been immense. This gives such companies a competitive advantage over the other competitors as many consumers wish to be associated with it for its good work. The doctrine of social responsibility is frequently a pretense for actions rather than a reason for such actions. To illustrate, it may well be in the long run interest of a corporation that is a big employer in a small region to devote resources to providing social amenities to that community or to improving its administration. Such a move may make it easier to attract skilled employees; it may reduce the wages or losses from sabotage or have other positive effects. Moreover, given the laws about the deductibility of corporate charitable contributions, the corporate can maximize on charities they favor by having the stockholders make the gift than by doing it themselves. This way they can contribute an amount that would otherwise have been paid as corporate taxes. Freeman’s theory stipulates that both the stakeholders and stockholders have a right to demand certain incentives from the management because all have a vested interest in the corporation. He points that there are two types of stakeholders; those groups who are vital to the survival and success of the organization and those that can affect or is affected by the corporation. The owners of the corporation have a financial interest and expect returns on their investments. The employees have their jobs and livelihood at stake while the suppliers provide raw materials and accessories to corporation and therefore the corporation is important to their success. Customers expect to benefit from the products and services offered by the corporation in exchange of resources while the local community grants the corporation the right to start in their area and in turn benefits from taxes and economic contributions of the corporation. Corporations ought to be governed in accordance with the principles of fair contracts. These principles are: Principle of contracting costs Principle of governance Principle of externalities Principle of limited immortality Principle of entry and exit The Agency principle Freeman considers a number of questions; why should managers pay attention to stakeholders; how should managers prioritize among shareholders; are the ethics of business different from everyday ethics? If so, how and why? According to Freeman, the most vital challenge to stakeholder theory is determining a justification for managers’ attention to stakeholders with regard to maximizing the shareholders wealth. When organizations accept the benefits of a mutually beneficial scheme of cooperation then they must honor their obligations to the stakeholders. Shareholders are a significant contributor to the existence of a corporate. They are owed a significant obligation that may take the form of dividends or earnings per share. However the obligation owed to the shareholders and the stakeholders is of the same kind and only differs in extent. There is no special fiduciary obligation owed to either group. The obligations are fairness based.Managers have the obligation of exercising fairness and moral values. They should support the well-being of stakeholders as representatives of the organizations. Determining who stakeholders of a business are is another challenge. How do managers decide who their stakeholders are? Should they account for the myriad groups or just the surrounding community, their employees, suppliers and those closely related to the business? Is natural environment part of the stakeholder? The effects portrayed by derivative stakeholders may have beneficial or harmful effects to the cooperation and its normative stakeholders. That is the reason why organizations have to consider them as legal stakeholders. In addition, those groups from whom the organization has accepted benefits should form part of its stakeholders. This will include customers, local community, employees, financiers and suppliers. Natural environment may not be a stakeholder but because it is of interest to normatively stakeholders then the organization has to make it its obligation to protect the environment. One of the most popular ideas in the world of business ethics has been the suggestion that ethical actions in business context should be dealt with as a set of fiduciary obligations towards various stakeholder groups. Joseph Heath outlines two other approaches to business ethics; one, a minimal conception and the other a broader conception. The minimal conception is anchored on the concept of a fiduciary obligation towards stockholders while the broader conception focused on the notion of market failure. Heath asks whether the stakeholder paradigm represents the most effective approach to the study of business ethics. He argues that the approach is controversial and has a lot of assumptions. The firms do not have vital social responsibilities which extend beyond the requirements of the law. In the modern economic system, professionals play a major role. As for managers there is a code of conduct that stipulates what is expected of them in the course of duty. According to Freeman, managers have fiduciary obligations toward all stakeholder groups. There is no good reason as to why firms should pay special attention to stakeholders. There are more strategic reasons for managers to worry about those whose contribution is vital to the success of the firm. The groups that are classified as stakeholders in the narrow sense are not necessarily those with the most interest in a certain decision, in terms of their potential welfare losses. If we look at the standard list of stakeholder groups, it tends to be those groups who are the best organized or who have the most immediate relationship to the organization, or who are best prepared to make their voices heard. For example, when a big company like General Motors considers closing down a plant in USA and moving it to Brazil, a standard multi-fiduciary stakeholder theory would insist that managers take account the effect of their decision, not just upon their workers in USA, but upon the local community whose livelihood depends upon their salaries. Hence the local community at the US plant would be considered stakeholders. But what about the local community in Brazil where the plant will be re-located? And those who will be employed? Presumably they also have a stake. The fact that the company has built a long time relationship with the people in USA may count for something but it cannot justify ignoring the interests of locals in Brazil. From a moral point of view a possible relationship can be as important as an actual one. The difference that exists is that the potential stakeholders do not know who they are and so are unable to organize themselves to articulate their interests or express grievances. Management involves an element of fiduciary responsibility and trust. However, the shareholder approach to corporate ethics suffers from the element of moral laxity demonstrated by managers. The approach does not seem to impose major obligations upon the management to satisfy the moral expectations of many people. It suggests that, as Freeman puts it, “Managers can pursue market transactions with suppliers and customers in an unconstrained manner.” They have moral obligations, not just to shareholders but to other groups as well. Because the stakeholders’ theory focuses on the relationship between the manager and different groups within the society, it tends to privilege the interests of those who are well organized over those who are poorly organized because the former are able to present themselves as a coherent with core interests. Works Cited Evan, William M, and R E. Freeman. A Stakeholder Theory of the Modern Corporation: Kantian Capitalism. , 1988. Print. Friedman, Milton. "A Friedman Doctrine: The Social Responsibility of Business Is to Increase Its Profits." Corporate Social Responsibility : Readings and Cases in a Global Context. (2008): 26-32. Print. Heath, Joseph. Business Ethics Without Stakeholders: Business Ethics Quarterly. (2006): 533- 557. Print. Read More