Question

“The legal regulatory framework for corporate governance in Australia fosters corporate social responsibility.”

Consider arguments for and against this statement.

Answer 1

Arguments for Social Responsibility

There are several core ideas about social responsibility of business. Over the period of time, the things have changed too much giving new thoughts and replacing the classical economic view of profit maximization in the business. Based on this feature in the present context, arguments for social responsibility are as follows:

1. Business is a part of society

Business is a part of society. Society is a system and business is one of its subsystems. Every subsystem of a system functions for the betterment of the whole system and not for its own betterment only. This version applies to business too. Therefore, business is responsible for the society as a whole and profit motive of the business cannot have precedence over other motives of the society.

2. Long-term Self-interest of Business

Social responsibility is in the long-term self-interest of the business. Existence of any business is because of existence of various social organs like financiers, employees, customers, society as a whole, etc., and not otherwise. Therefore, business should provide satisfaction to all these organs on continuous basis for its continued existence. By discharging social responsibility, the business may provide this satisfaction.

3. Moral Justification

Social responsibility has moral justification. This moral justification emerges from the fact that if any one takes something from others, he must give something to them in return. On moral ground, this equation must be based on equity so that it continues. A business takes various inputs (money, materials, people, information, etc.) from the society and gives outputs (goods and services) to the society by using various inputs. System of taking inputs and giving outputs works well only if it fulfills social requirements.

4. Creating Better Public Image

Any business which involves in fulfilling the aspirations of the society creates better image in the public. Creation of this type of image is a source of satisfaction itself for those who operate business. This also helps in increasing the business volume, both in terms of taking inputs and giving outputs.

5. Avoidance of Government Regulations

Government aims at maintaining equilibrium in the society on long-term basis. For this purpose, it tries to ensure that every organ of society meets social requirements. If any organ fails to do so, government has power to take actions against it. Since business is an organ of the society, government may take actions against those business organizations which involve in activities not meeting social requirements. In order to avoid such actions having long-term negative impact, it is preferable to adopt social responsibility.

6. Maintenance of Society

For maintaining society, there are legal provisions but these provisions cannot be comprehensive because of social changes on continuous basis. Therefore, the business has to be socially responsible in order to avoid anti-social activities so that society is maintained on continuous basis.

Arguments against Social Responsibility

There are various arguments against social responsibility though most of these are based on classical economics. These arguments are as follows:

1. Contrary to Basic Function of Business

The basic function of a business is to provide a product to its customers at a price which is lower than the level of satisfaction provided by the use of the product or, at the most, equal to that. If this relationship is reversed, the product becomes meaningless. Generally, cost of production is a significant factor in determining the product price. Discharge of social responsibility adds to cost, hence product price which may reverse the above equation and business may not remain viable in the long term.

2. Conflict with Profit Motive

Social responsibility is in conflict with profit motive of business. Undertaking business involves assuming risk. Earning profit is the reward for this risk. If social responsibility is added as an objective of business, it reduces profit margin which is against the concept of profit optimization even if not profit maximization. Thus, social responsibility and profit motive do not proceed in the same direction.

3. Distortion in Resource Allocation

Social responsibility leads to distortion of resource allocation. Resources in an economic system are allocated on the principle that every resource finds its most optimum utilization. This utilization is best possible without social responsibility and not with it. Thus, social resources may go in waste if the concept of social responsibility is added to business operations.

4. Imposition of Business Values

Discharging social responsibility involves lot of influence of the business on the society. Therefore, by undertaking social responsibility, a business is likely to impose its own values on the society, thereby replacing the social values with business values. This phenomenon has taken place in many cases. This is highly undesirable from social point of view.

5. Inefficiency in the System

Social responsibility brings inefficiency in the system. There is no substitute for the power of self-interest to get people to act. Any replacement of self-interest will, therefore, be fatal to the efficiency of the system. Social responsibility tends to replace self-interest of business defined in terms of profit motive to a great extent, thus, making the business as a system inefficient.

6. Operational Problems

There are certain operational problems in implementing social responsibility. Conceptually as well as operationally, social responsibility is a confusing term. Therefore, managers involved in managing business affairs are not very clear about what they are expected to do under social responsibility. As a result, actions ranging from mere showing lip sympathy to undertaking multi-crore concrete programmes are included in social responsibility.

Conclusions

The arguments of those who argue that business organizations have nothing to do with social responsibility except the maximization of shareholders’ wealth are weak on two points.

1. First, they overstate the trend and ultimate magnitude of business’s voluntary assumption of social responsibility.

2. Second, they want business organizations to do something they cannot do and that is to ignore societal demands on them.

In fact, no business can survive for long in total disregard to its social concern. Many forces will come in its way to destroy it. Therefore, even if business is involved in making profit, it is done through the creation of utility to the social needs. Better these social needs served, better will be the prospect of its survival and progress. Even in Western countries, where economic activities are comparatively free from controls, it has been accepted that profit is not the sole criterion for measuring the success of a business organization.

Usually, people misinterpret the concept of business objective and view the social responsibility as a focus which detracts from or is counter to the profit making.

Therefore, the issue is not whether business has social responsibility; it has. The fundamental issue is to identify this responsibility in general and for individual companies in particular.