Business Ethics Assignment
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Chapter09TheResponsibleOfficeCorporationsandSocialResponsibility.pptxChapter 09: The Responsible Office: Corporations and Social Responsibility
Business Ethics MGT531
College of Business administration
AlYamamaH University, Riyadh, Ksa
Learning Objectives
This chapter defines different legal structures for businesses and explores ways that individual companies may be understood not only as pursuing economic goals but also as possessing broad ethical responsibilities in society.
What Kind of Business Organizations Are There?
Types of Businesses
Every form of business organization comes with advantages and disadvantages, and the specific kinds of organization that may be formed are numerous and change from state to state. There are, however, a number of basic types:
Sole proprietorship
Partnership
Limited liability company
S corporation
Nonprofit organization
Corporation
A sole proprietorship (A business owned by a single individual) is the easiest kind of business to start. All you need to do is go down to the county courthouse and fill out a DBA, which is a form officially registering that you’re opening a business with the name you choose. DBA means doing business as. Benefits of a sole proprietorship include the speed and ease of getting it going. Further, sole proprietors can take advantage of tax accounting fitted to business reality. Finally, sole proprietorships have the advantage of belonging to their owner. The main disadvantage of a sole proprietorship is that the company really is an extension of you, and you’re on the hook for whatever it does. Unlimited liability, finally, is legal, but it’s also clear that there’s an ethical dimension to the responsibility. While few assert that it’s morally wrong to fail in business, there is a reasonable objection to be made when those who fail try to avoid paying the cost.
Types of Businesses
A partnership resembles a sole proprietorship. The main difference, obviously, is that there’s more than one owner: maybe there are two partners with 50 percent each, or one with 50 percent and then a group of smaller shareholders each owning 10 percent of the enterprise. The bookkeeping is pretty straightforward since profits are allotted in accordance with how great a share each partner owns. All partnerships must have, finally, at least one general partner who faces unlimited liability for the company’s actions. On the ethical front, responsibility starts getting murky as you move to multiple owners.
Limited liability companies (LLC) and S corporations (Companies usually owned by a limited number of individuals that provide some legal protections to owners for claims made against the company) are very similar. They’re both hybrids of partnerships and corporations. From the partnership side they take the tax structure. Called pass-through taxation(A tax regime where the profits (or losses) of a company are passed through to the owners who are responsible for declaring and paying taxes—the company itself pays no taxes.), profits are divided among the partners or shareholders. Then those individuals pay taxes on the money like it’s income, a normal paycheck. What these two take from the corporate side—and the main reason people form an LLC or an S corporation—is that the enterprise’s legal status provides some protection against liability lawsuits.
Nonprofit corporations (Corporations formed to serve a charitable or civic cause that are exempt from taxes and channel income back into the cause they’re formed to serve.) exist in a class by themselves. Usually formed to serve a charitable or civic cause, they don’t have to pay taxes since they don’t make profits: they spend all their income promoting the cause they’re set up to serve. The operators of nonprofits often enjoy complete protection from liability claims. What about the ethics?
Types of Businesses
Technically, what most of us mean when we use the term corporation(A legally independent business that protects its owners from all liability claims made against the company) is a C corporation (as opposed to an S corporation). One financial difference between the two is that a C corporation is taxed twice. First, the government takes a chunk of the corporation’s profits before they’re distributed to the company’s owners, who are all those individuals holding shares. Then when the shareholders get their part, each must pay taxes on it again. Another difference is that C corporations are not limited in terms of number of shareholders. Finally, most of the corporations that people are familiar with are public(A corporation with shares available for purchase by the general public.), meaning that the company’s shares are available for purchase by anyone with the money to spend. There are, it should be noted, private corporations (A corporation with share allocation limited to a group or single person.)(and the similar “closely held” corporations) where share allocation is limited to a group or single person, but again, most of the commonly referenced incorporated companies are listed for public sale in places including the Stock Exchange, and individual may become partial owners.
A corporation with share allocation limited to a group or single person. anyone—should take moral responsibility for what the corporation does. Second, because corporations today have grown so large and powerful, because they touch all our lives in so many ways so often, the ethical questions they raise become hard to avoid. Both these dimensions of the modern corporation, the ethical ambiguity and the potentially huge size, relate to the history of the institution.
Three Theories of Corporate Social Responsibility
Three Approaches to Corporate Responsibility
According to the traditional view of the corporation, it exists primarily to make profits. From this money-centered perspective, insofar as business ethics are important, they apply to moral dilemmas arising as the struggle for profit proceeds. These dilemmas include: “What obligations do organizations have to ensure that individuals seeking employment or promotion are treated fairly?” “How should conflicts of interest be handled?” and “What kind of advertising strategy should be pursued?” Broadly, there are three theoretical approaches to these new responsibilities:
Corporate social responsibility (CSR)
The triple bottom line
Stakeholder theory
Corporate Social Responsibility (CSR)
The title corporate social responsibility(In general, the conviction that corporations are not only legal entities with responsibilities but also moral entities, and they hold ethical obligations comparable to those of citizens in a society.) has two meanings. First, it’s a general name for any theory of the corporation that emphasizes both the responsibility to make money and the responsibility to interact ethically with the surrounding community. Second, corporate social responsibility is also a specific conception of that responsibility to profit while playing a role in broader questions of community welfare.
As a specific theory of the way corporations interact with the surrounding community and larger world, corporate social responsibility (CSR) (As a specific theory of business ethics, a package of four obligations the corporation holds as an independent ethical actor in society; the responsibilities are economic, legal, ethical, and philanthropic.) is composed of four obligations:
Corporate Social Responsibility (CSR)
The economic responsibility to make money. Required by simple economics, this obligation is the business version of the human survival instinct. Companies that don’t make profits are—in a modern market economy—doomed to perish. Of course there are special cases. Nonprofit organizations make money (from their own activities as well as through donations and grants), but pour it back into their work. Also, public/private hybrids can operate without turning a profit.
The legal responsibility to adhere to rules and regulations. Like the previous, this responsibility is not controversial. What proponents of CSR argue, however, is that this obligation must be understood as a proactive duty. That is, laws aren’t boundaries that enterprises skirt and cross over if the penalty is low; instead, responsible organizations accept the rules as a social good and make good faith efforts to obey not just the letter but also the spirit of the limits.
The ethical responsibility to do what’s right even when not required by the letter or spirit of the law. This is the theory’s keystone obligation, and it depends on a coherent corporate culture that views the business itself as a citizen in society, with the kind of obligations that citizenship normally entails. It might not be the right thing to do in terms of pure profits, but from a perspective that values everyone’s welfare as being valuable, the measure could be recommendable.
The philanthropic responsibility to contribute to society’s projects even when they’re independent of the particular business. A lawyer driving home from work may spot the local children gathered around a makeshift lemonade stand and sense an obligation to buy a drink to contribute to the neighborhood project. Similarly, a law firm may volunteer access to their offices for an afternoon every year so some local schoolchildren may take a field trip to discover what lawyers do all day.
The Triple Bottom Line
The triple bottom line (A form of corporate social responsibility dictating that corporate leaders tabulate results not only in economic terms but also in terms of company effects in the social realm and with respect to the environment.) is a form of corporate social responsibility dictating that corporate leaders tabulate bottom-line results not only in economic terms (costs versus revenue) but also in terms of company effects in the social realm, and with respect to the environment. There are two keys to this idea. First, the three columns of responsibility must be kept separate, with results reported independently for each. Second, in all three of these areas, the company should obtain sustainable results. The notion of sustainability is very specific. At the intersection of ethics and economics, sustainability means the long-term maintenance of balance. The balance is defined and achieved economically, socially, and environmentally:
Economic sustainability values long-term financial solidity over more volatile, short-term profits, no matter how high. According to the triple-bottom-line model, large corporations have a responsibility to create business plans allowing stable and prolonged action. That bias in favor of duration should make companies hesitant about investing in things like dot-coms. While it’s true that speculative ventures may lead to windfalls, they may also lead to collapse. Economic sustainability values long-term financial solidity over more volatile, short-term profits, no matter how high. According to the triple-bottom-line model, large corporations have a responsibility to create business plans allowing stable and prolonged action. That bias in favor of duration should make companies hesitant about investing in things like dot-coms. While it’s true that speculative ventures may lead to windfalls, they may also lead to collapse.
The Triple Bottom Line
3) Social sustainability values balance in people’s lives and the way we live. A world in which a few Fortune 500 executives are hauling down millions a year, while millions of people elsewhere in the world are living on pennies a day can’t go on forever. As the imbalances grow, as the rich get richer and the poor get both poorer and more numerous, the chances that society itself will collapse in anger and revolution increase. The threat of governmental overthrow from below sounds remote—almost absurd—to who are accustomed to a solid middle class and minimal resentment of the wealthy.
4) The fair trade movement fits this ethical imperative to shared opportunity and wealth. Developed and refined as an idea in Europe in the 1960s, organizations promoting fair trade ask businesses—especially large producers in the richest countries—to guarantee that suppliers in impoverished nations receive reasonable payment for their goods and services even when the raw economic laws of supply and demand don’t require it. An array of ethical arguments may be arranged to support fair trade, but on the front of sustainability, the lead argument is that peace and order in the world depend on the world’s resources being divided up in ways that limit envy, resentment, and anger. Social sustainability doesn’t end with dollars; it also requires human respect. All work, the logic of stability dictates, contains dignity, and no workers deserve to be treated like machines or as expendable tools on a production line. Finally, social sustainability requires that corporations as citizens in a specific community of people maintain a healthy relationship with those people.
5) Environmental sustainability begins from the affirmation that natural resources—especially the oil fueling our engines, the clean air we breathe, and the water we drink—are limited. If those things deteriorate significantly, our children won’t be able to enjoy the same quality of life most of us experience. Conservation of resources, therefore, becomes tremendously important, as does the development of new sources of energy that may substitute those we’re currently using.
Together, these three notions of sustainability—economic, social, and environmental—guide businesses toward actions fitted to the conception of the corporation as a participating citizen in the community and not just as a money machine. One deep difference between corporate social responsibility and the triple bottom line is cultural.
Stakeholder Theory
Stakeholder theory, which has been described by Edward Freeman and others, is the mirror image of corporate social responsibility. Instead of starting with a business and looking out into the world to see what ethical obligations are there, stakeholder theory starts in the world. It lists and describes those individuals and groups who will be affected by (or affect) the company’s actions and asks, “What are their legitimate claims on the business?” “What rights do they have with respect to the company’s actions?” and “What kind of responsibilities and obligations can they justifiably impose on a particular business?” In a single sentence, stakeholder theory affirms that those whose lives are touched by a corporation hold a right and obligation to participate in directing it.
Who are the stakeholders surrounding companies? The answer depends on the particular business, but the list can be quite extensive. The stakeholders include:
Company owners, whether a private individual or shareholders
Company workers
Customers and potential customers of the company
Suppliers and potential suppliers to the company
Everyone living in the town who may be affected by contamination from workplace operations
Creditors whose money or loaned goods are mixed into the company’s actions
Government entities involved in regulation and taxation
Local businesses that cater to company employees (restaurants where workers have lunch, grocery stores where employee families shop, and similar)
Other companies in the same line of work competing for market share• Other companies that may find themselves subjected to new and potentially burdensome regulations.
The first five on the list—shareholders, workers, customers, suppliers, and community—may be cited as the five cardinal stakeholders.
Conclusion on the Three Forms of Corporate Social Responsibility
Traditionally, the directors of companies have had an extremely difficult but very narrowly defined responsibility: guide the enterprise toward money. The best companies have been those generating the highest sales, gaining the most customers, and clearing the largest profits. As for ethical questions, they’ve been arranged around the basic obligation to represent the owners’ central interest, which presumably is to profit from their investment. Consequently, the field of business ethics has mainly concerned conflicts and dilemmas erupting inside the company as people try to work together to win in the very competitive economic world. The idea of corporate social responsibility—along with the related ideas of the triple bottom line and stakeholder theory—opens a different kind of business ethics. Morality in the economic world is now about corporate directors sensing and responding to a broad range of obligations, ones extending through the town where the business is located and then out into surrounding communities and through society generally.
Should Corporations Have Social Responsibilities? The Arguments in Favor
Why Should Corporations Have Social Responsibilities?
Broadly, there are three kinds of arguments in favor of placing corporations, at least large and fully developed ones, within an ethical context of expansive social and environmental responsibilities:
Corporations are morally required to accept those responsibilities.
The existence of externalities attaches companies, in operational and economic terms, to those responsibilities.
Enlightened self-interest leads to voluntarily embracing those
The Moral Requirement Argument
The moral requirement that business goals go beyond the bottom line to include the people and world we all share is built on the following arguments:
Corporations are already involved in the broad social world and the ethical dilemmas defining it. For example, factories producing toxic waste are making a statement about the safety and well-being of those living nearby every time they dispose of the toxins. If they follow the cheapest—and least safe—route in order to maximize profits, they aren’t avoiding the entire question of social responsibility; they’re saying with their actions that the well-being of townspeople doesn’t matter too much.
Corporations, at least well-established, successful, and powerful ones, can be involved in the effective resolution of broad social problems, and that ability implies an obligation. Whether we’re talking about a person or a business, the possession of wealth and power is also a duty to balance that privilege by helping those with fewer resources.
Corporations rely on much more than their owners and shareholders. They need suppliers who provide materials, employees who labor, a town where the workplace may be located, consumers who buy, air to breathe, water to drink, and almost everything.
Because businesses cause problems in the larger world, they’re obligated to participate in the problems’ resolution. What kinds of problems are caused?
Should Corporations Have Social Responsibilities? The Arguments in Favor
The Externality Argument
The second type of argument favoring corporate social responsibility revolves around externalities. These attach corporations to social responsibilities not morally but operationally. An externality19 in the economic world is a cost of a good or service that isn’t accounted for in the price (when that price is established through basic laws of supply and demand). For example, if a corporation’s factory emits significant air pollution, and that results in a high incidence of upper respiratory infections in the nearby town, then a disproportionately high number of teachers and police officers (among others) are going to call into work sick throughout the year. Substitute teachers and replacement officers will need to be hired, and that cost will be borne by everyone in town when they receive a higher tax bill. The corporation owning the pollution-belching factory, that means, gets the full amount of money from the sale of its products but doesn’t pay the full cost of producing them since the broader public is shouldering part of the pollution bill. This strikes many as unfair.
The Enlightened Self-interest Argument
The third kind of argument in favor of corporations as seats of social responsibility grows from the notion of enlightened self-interest. Enlightened self-interest (In the business world, taking on broad responsibilities for the social welfare because, on careful analysis, that public generosity also benefits the company’s bottom line.) means businesses take on broad responsibilities because, on careful analysis, that public generosity also benefits the company. The benefits run along a number of lines:
Corporations perceived as socially engaged may be rewarded with more and more satisfied customers.
Organizations positively engaged with society or the environment may find it easier to hire top-notch employees. All workers seek job satisfaction, and given that you spend eight hours a day on the job, the ingredients of satisfaction go beyond salary level.
Organizations taking the initiative in regulating themselves in the name of social betterment may hold off more stringent requirements that might otherwise be imposed by governmental authorities.
Should Corporations Have Social Responsibilities? The Arguments Against
The Argument That Businesses Can’t Have Social Responsibilities
A business can’t have moral responsibilities any more than a wrench can. Only humans have moral responsibilities because only we have consciousness and intentions: we’re the only things in the world that can control our actions, that can distinguish between what we want to do and what’s right to do. Therefore, only we can have responsibilities in the ethical sense. What, then, is a business? Nothing more than a tool, something we make to further our ends. It may work well or poorly, but no matter what, it doesn’t do what it wishes, so we can’t blame or credit the business, only those individuals who use it for one purpose or another.
The Argument That Corporate Executives Are Responsible Only to Shareholders
Corporate executives are employees of the owners of the enterprise. They’re contracted and obligated to conduct the business as the owners desire, not in accord with the wishes of some other people out in the world advocating broad social concerns. Executives in this sense are no different from McDonald’s burger flippers: they’re hired and agree to do a certain thing a certain way. If they don’t like it, they’re free to quit, but what they can’t do is take the job and then flip the hamburgers into the trash because their friends are all texting them about how unhealthy McDonald’s food is.
What do corporate owners desire? According to Friedman, the typical answer is the highest return possible on their investment. What about the executive who decides to dedicate time and a corporation’s resources to social welfare projects (to things like reducing runoff pollution even further than the law requires or hiring released felons as a way of easing their passage back into society)? Friedman is particularly cutting on this point. It’s despicable selfishness. There’s nothing easier than generosity with other people’s money. And that’s what, Friedman hints, CSR is really about. It’s about corporate executives who like the idea of receiving accolades for their generous contributions to society, and they like it even more because the cash doesn’t come out of their paycheck; it’s subtracted from shareholder returns. There’s the seed of an argument here, finally, that not only is corporate social responsibility not recommendable, it’s reproachable: in ethical terms, corporate leaders are duty bound to refuse to participate in social responsibility initiatives.
The Argument That Society Won’t Be Served by Corporate Social Responsibility
One serious practical problem with the vision of corporate executives resolving social problems is it’s hard to be sure that their solutions will do good. Presumably, corporate executives got to be executives by managing businesses profitably. That’s certainly a difficult skill, but the fact that it has been mastered doesn’t automatically imply other talents. More, given the fact that corporate executives frequently have no special training in social and environmental issues, it’s perfectly reasonable to worry that they’ll do as much harm as good.
One example of the reversed result comes from Newsweek. Executives at the magazine probably thought they were serving the public interest when they dedicated space in their April 28, 1975, issue to the threatening and impending environmental disaster posed by global…cooling. Not a very enticing subject, they probably could’ve done more for their circulation numbers by running a story (with lots of pictures) about the coming summer’s bathing suit styles, but they did the science to stoke broad discussion of our environmental well-being. As for the stoking, they certainly succeeded.Today, many scientists believe that global warming is the real threat and requires corporations to join governments in reducing carbon emissions. They have a hard time getting their message out cleanly, though, when there’s someone around bringing up that old Newsweek article to discredit the whole discussion.
The Right Institution for Managing Social Problems Is Government
Social problems shouldn’t be resolved by corporations because we already have a large institution set up for that: government. If members of a society really are worried about carbon emissions or the disposal of toxic waste at chemical plants, then they should express those concerns to elected representatives who will, in turn, perform their function, which is to elaborate laws and regulations guiding the way all of us—inside and outside of business—live together. Government, the point is, should do its job, which is to regulate effectively, and those in the business world should do their job, which is to comply with regulations while operating profitably.
Underneath this division of labor, there’s a crucial distinction. Friedman believes that human freedom is based to some significant degree in economic life. Our fundamental rights to our property and to pursue our happiness are inviolable and are expressed in our working activities. The situation is complicated, however, because it’s also true that for us to live together in a society, some restrictions must be placed on individual action. No community can flourish if everyone is just doing what they want. There’s room for quite a bit of discussion here, but in general, Friedman asserts that while government (and other outside institutions) have to be involved in regulation and the imposing of limits, they shouldn’t start trying to mold and dictate basic values in the economic realm, which must be understood in principle as a bastion of individual liberty and free choices.
At this juncture, Friedman’s essay reaches its sharpest point. The notion of corporate social responsibility, Friedman asserts, is not only misguided; it’s dangerous because it threatens to violate individual liberty. Stronger, the violation may ultimately lead to socialism(In the economic world, the subordination of individual liberty to the general welfare.), the end of free market allocation of resources because rampant political forces take control in the boardroom.
The Right Institution for Managing Social Problems Is Government
The movement to socialism that Friedman fears comes in two steps:
Environmental activists, social cause leaders, and crusading lawyers will convince at least a handful of preening business executives that working life isn’t about individuals expressing their freedom in a wide open world; it’s about serving the general welfare. The notion of corporate social responsibility becomes a mainstream concern and wins wide public support.
With the way forced open by activists, the risk is that government will follow: the institution originally set up to regulate business life while guaranteeing the freedom of individuals will fall into the custom of imposing liberty-wrecking rules. Under the weight of these intrusive laws, working men and women will be forced to give up on their own projects and march to the cadence of government-dictated social welfare projects. Hiring decisions, for example, will no longer be about companies finding the best people for their endeavors; instead, they’ll be about satisfying social goals defined by politicians and bureaucrats.
It’s difficult to miss the fact that Friedman’s worries were colored by the Cold War, by a historical moment that now feels remote in which the world really did hang in the balance between two views of working life: the American view setting individual freedom as the highest value and the Soviet view raising collectivism and the general welfare above all personal economic concerns and liberties.
The Best Way for Corporations to Be Socially Responsible Is to Increase Profits
The final major argument against corporate social responsibility in its various forms is that the best way for most corporations to be socially responsible is to contribute to the community by doing what they do best: excelling in economic terms. When corporations are making profits, the money isn’t just disappearing or piling up in the pockets of the greedy super rich (though some does go there); most of it gets sent back into the economy and everyone benefits. Jobs are created, and those that already exist get some added security. With employment options opening, workers find more chances to change and move up: more successful corporations mean more freedom for workers.
Further, corporations don’t get to be successful through luck, but by delivering goods and services to consumers at attractive prices. Corporate success, that means, should indicate that consumers are doing well. Their quality of life improves as their consumer products improve, and those products improve best and fastes when corporations are competing against each other as freely as possible.
The term marketplace responsibility (The twin views that the notion of corporate social responsibility is misguided and dangerous, and the corporate purpose of profit maximization serves the social welfare while cohering with the value of human freedom that should be paramount in business ethics.), finally, names the economic and social (and political) view emerging from Friedman’s arguments. The title doesn’t mean ethical responsibility in the marketplace so much as it does the specific conception of ethical responsibility that the open marketplace produces. It has two aspects:
first, the notion of corporate social responsibility is misguided and dangerous, and
second, the corporate purpose of profit maximization serves the social welfare while cohering with the value of human freedom that should be paramount in business ethics.
Conclusion: Corporate Social Responsibility versus Marketplace Responsibility
Advocates of corporate social responsibility believe corporations are obligated to share the burden of resolving society’s problems. They maintain that the responsibility stands on pure moral grounds. More, there are operational reason for the responsibilities: if businesses are going to contaminate the environment or cause distress in people’s lives, they should also be actively working to resolve the problems. Finally, there’s the strong argument that even if the corporate purpose should be to make profits, social responsibility is an excellent way to achieve the goal.
Advocates of marketplace responsibility—and adversaries of the corporate social responsibility model—argue that by definition corporations can’t have moral responsibilities. Further, to the extent ethical obligations control corporate directors, the obligations are to shareholders. More, corporate directors aren’t experts at solving social problems, and we already have an institution that presumably does have expertise: government. Finally, there’s a strong argument that even if the corporate purpose should include broad social responsibilities, free individuals and corporations in the world making profits is an excellent way to achieve the goal.
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