Corporate social responsibility: Another view

Corporate social responsibility: Another view

William L Shanklin, Western Kentucky L/‘niversity Numerous individuals, discussing the topic of corporate social r~sponsibility, have exhorted the b...

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William L Shanklin, Western Kentucky

L/‘niversity

Numerous individuals, discussing the topic of corporate social r~sponsibility, have exhorted the business community to demonstrate inci-lrased concern for social welfare. However, some observers 1,8,12] believe that executives have become less interested in social responsiMities and more disillusioned by the results of the social-responaibilitb era. The apparent change in executives’ attitudes leads to several questions that need answering: Has corporate experimentation with social programs convinced managers that the pursuit of social responsibility _ is basically inimical to the quest for profits. 3 Is the business cornmunity’s commitment to the philesophy of corporate social responsibility moribund? Is the idea destined to die of benign neglect? Conelusions pertaining to these qu. ;tions are developed in this article. The analysis includes the formulation of a theoretical basis for evaluating and resolving the central issues which confound executive decision making as it relates to corporate social responsibility. The Question of Commitment A plethora of laws and regulations, at all levels of government, has put many of the major corporate social responsibilities beyond voluntary action. Standards set for pollution control, equal opportunity employment, and product safety are notable examples. Chief executives generally have reacted to legal requirements by institutionalizing the programs needed to ensure corporate compliance, thereby making societal considerations unavoidable inputs into managerial decision making. For example, one company maintains a policy that requires the inclusion of minority socioeconomic reports in all investment proposals for new and expanded facilities [8]. The growth of institutionalization is a major reason why executive interest in corporate social responsibility is waning. Managers naturally have become le s enthusiastic about engaging in philosophical disg Yoluine 4, Number 1

Febmwy,

1976

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cussic~ of social programs which already are ingrained in the corMuch sf the public relations accompanying pIorate infrastructure. early corporate efforts to demonstrate social accountability has abated. In its place-at least among policy-seeking managers---is the no nonsense approach of “let’s get on with it.” Data are available which suggest a significant and growing concern for and commitment to social responsibility among leading American industrialists. The accounting firm of Ernst and Ernst has tracked the progress of external corporate social reporting since 1971 by compiling annual summaries of social measurement disclosures in the public reports of Fortune 500 companies. The 1975 Ernst and Ernst compilation [4], wh’ICh is based upon corporate reports for the fiscal year ended on or before May 1, 1975, acknowledges the inevitability of human error in preparing such analyses, but states that the data nevertheless are sufficiently valid to provide meaningful insights into the collective social performance of the 500 companies. Table 1, excerpted from the 1975 report, depicts a definite and augmented proclivity for social reporting in the 500 major corporations operating in the United States. In 1971, 239 of the 500 companies made social-measurement disclosures in various annual reports; in 1974,3% of the companies did so-an increase of nearly 45 percent. Table

I:

closures,

Fortune 500 Companies

Making Social

Dis-

1971-1974 1974 Number

Companies repot:iug SM disclosures 346 Companies with uo 3-fdiscloau-es 151 Annual reports not readily available 3 Total

Measurement

%

69.2 30.2 .E

500 100.0

1973 Number 298 198 4

%

59.6 39.6 .8

500 100.0

1972 Number 286 206 8

%

57.2 41.2 1.6

500 100.0

1971 Number 239 226 35

%

47.8 45.2 7.0

500 100.0

Ernst ;igd Ernst .grouped corporate social activities under six categories frpfsocial responsibil’ty. The category most frequently cited in *he latest corporate reports was environmental controi. There were 447 references-i ,n some cases, multiple references were made-to efforts de&gned to militate against pollution. The remaining five classifications, and the number of citations received by each, were as follows: equal opportunity’ (e.g., minority employment and aid to minority baisinesses), ,421; community involvement (e.g., donations to education aind the arts), 321; personnel (e.g., promotion of health and safety), 20;6; productrs (e.g., safety, nutritional value), 70; and miscellaneous social disclosures’, 46. Almost 70 percent of the companies made public social dis-

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ClOSUreSfor 1974, compared to 48 percent three years earl& r. This finding demonstrates a burgeoning growth in businesses’ concern for social responsibility. Moreover, a close examination of the social activities of the reporting companies reveals far more than a token commitment to the ideal of corporate social responsibility. For example, a steel company spent $45 million in 1974 on environmental control; an oil company reduced its d
_lourmd of Bukess

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Responsibility

Research

vs. Pro fitability

One rubric taught in elementary

forensics holds that debaters should define their terms. Unfortunately, the rule has not been observed in the .continuing argument over the desirability of private-sector participation in social programs. Two decades of debate concerning the many controversial aspects of corporate social responsibility has failed to produce anything approaching a universally accepted definition (lexical or operational) of the concept itself. The term, like love and intelligence, has as many meanings as there are people with opinions about it. The problem of faulty definition has tended to prolong the debate, to exaggerate differences between so-called advocates and opponents of corporate social responsibility, and to cloud the issue of whet&G or rmt there is a real conflict between profitability and social responsiGlity. Two individuals frequently cited as being in opposition to corporate social responsibility are Milton Friedman and Theodore Levitt. subFriedman [tS] h as argued that the doctrine is fundamentally versive; it undermines a free enterprise economy. In a free economy, the sole responsibility of business is to employ its resources in activities that yield. profits, so long as business stays within the framework of l.aw established by society. Levitt [9] follows a similar line of thought. Business should take care of the material aspects of welfare, while government should handle the general welfare : the business of business is earning profits. Numerous critics have misconstrued the Friedman-Levitt position to mean that business has no social responsibilities beyond earning profits. Yet, Levitt [9] h as spoken of a sensible welfare wherein corporate welfare is acceptable if it makes good economic sensewhich, in his judgment, is often the case. Moreover, as early as 1958, he chastised business for continually fighting the public interest, particularly in matters of civil rights. Friedman likewise has been an ardent supporter of civil rights. In a recent magazine column [6], for example, he defended Jewish entrepreneurs from derogatory and unsupportable remarks made by a U.S. Army general. . Some advocates of civil rights in business, and elsewhere, call the obligation to ensure equal rights in commcrc’:: a corporate social responsibility whereas Levitt and Friedman lab/e1 it in the ‘“public .interest” or part of the “framework of law.” There obviously is concurrence on the moral eorrectaess of equal opportunity in business, but the terminology used to express
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socially responsible, public interest, or framework-of-law activities profoundly affecting the quality of life? If this is so-and it seems tenable--ther. the dichotomy separating those of the Friedman-Levitt school of thought from their detractors is not nearly as great as is usually implied. Few would disagree that companies do have social responsibilities. Therefore, the essence of the controversy surrounding the topic is captured by the following questions: Ir which kinds of social endeavors should companies be involved? To what extent should they be involved? And, who should make these decisions ? Previous dialogue pertaining to thes#e issues has beeu vitiated by the failure to delineate &ha; is meant by car orate social responsibility. Such questions cannot be meaningfully answered unless debate focuses upon specific kinds of responsibilities, because the answers tend to vary according to the type of social responsibility under consideration. Areas of cor?sTnsus can’ be! found if individuals with supposedly divergent viewpoilt;FB con. sider ;a particular kind of social responsibility in lieu of arguiilg ihe merits of corporate involvement in social programs per se. A taxonom), is needed. For this reason, the Iquestions posed earlier in this paragraph are addressed using the typology shown in Table 2. The major crie terion employed to examine the questions is the effect that ear:h type of social responsi.bility has on corporate earnings. Stockholder wealth maximization is assumed to be the primary goal of corporate mans agement. GbZe

2!: A Typology

of CorporateSocial

Responsibility

Type of Social Responsibility Appropriate Decision Maker(s) Legal Compensatory Ethical Philanthropic

Declt;ionCriteria

Public servants [government) Estimated socie-ii1welfare Profitability Corporate management Corpora.te management Sundry sundry Corporate stockholders

The most tractable classification in the typology to deal with is the legal one. Since managers must comply with laws and regulations governing business, or suffer the prescribed penalties for not doing so, they actually have no decisions to make with respect to meeting this typbe of societal obligation. in effect, decisions are made for them by public servants. The decision criteria used by the latter are qualitative and Iquantitative estimates of the effects of codified standards of business conduct on societal welfare. The only viable course of action for management to take is to accept legal standards as “givens,” and to live letter of the law. To do otherwise not only is et

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but also is contrary to the stockholders’ best monetary interests. Litigation, fines, and lost revenues arising from unfavorable publicity are detrimental tc the corpration in a monetarily measurable way. This is not to say, however, that companies should not lobby vigorously against regulations perceived as not in the public interest. The next category in the typology is compensatory corporate social responsibility. Management has the responsibility to society and to stockholders to engage the corporation in potentially compensatory ventures. The favorable denouements of profits are, of course, many. Strong profits increase government tax revenue and the funds levied are utilized for the general welfare of the populace. Reinvested business earnings foster corporate growth which, in turn, contributes to a robust economy with the desirable attendant effects. Profiks enhance stockholder wealth, which keeps ahe capital markets attractive to investorsthereby providin,p a further impetus to corporate growth. Profits, when viewed in this manner, are not obscenities to be apologized for; on the contrary, they are instrumentalities of social well-being. Management has no inherent right to procsed with any project unless it meets some acceptable criterion of profitability-or is required by law. For management knowingly to commit corporate resources to endeavors that do not meet such a criterion, without first consulting stockholders, is tantamount to abdicating ita charge to pursue the objective o f s t oc kh o Id er wealth maximization. Ethics is the third category in the taxonomy. Social responsiveness requiles that business decisions be made against ethical benchmarks as well as against legal and monetary ones. Managers have the societal obligation to refrain from unethical practices. Eowever, to be ethically responsible it is not sufficient for management to act correctly; moral intent also is necessary [3]. It is possible for a company to be in compliance with all laws and regulations, to be highly profitable, and to be commendably philanthropic-and yet to be ethically irresponsible. Corporate actions can circumvent the spirit of the law without violating its letter.. In some cases, the iii\morality of corporate actions is obvious. It is clearly immoral to break the law in the pursuit of profits. Unfortunately, deciding what is right and wl at is wrong frequently is not SO easy to do. It is especially difficult r”or international businessmen to do so because ethical norms vary from nation to nation. For example, the question has arisen: Are corporate practices that are illegal in the IJnited States, and therefore unethical, also unethj;*al in countries where such practices are legal or accepted ways of doing business? Ethical philosophies need not be sophisticated to be useful to

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executives.TWOeminent decision makeis, Thomas Jefferson and Harry Truman, followed the simple but poignant moral precept :“. . . ask yourself how YOU would act were all the world watching you, and act accordingly” [ 101. A h euristic, fashioned from the Jefferson-Truman code of conduct, seems capable of providing managers with a practicaI guide to ethics: Management should spurn proposed courses of carporate action that, because of ethical issues, would prove embarrassing if publicized in the annual stockholder report and in the popular press, Socially responsible managers seek profits with all the vigor and vitality they can muster, but do so under the constraint of business ethics. The final category in Table 2 is philanthropy. It encompasses all monetarily unprofitable, noncompulsory corporate social programsi.c., those programs not required by law or by a collective bargaining agreement. Charitable giving, slum rehabilitation at a monetary loss, and college scholarship grants for employees’ children are examples. Difficulties arise for managers because the monetary unprofitability of corporate philanthropy must be balanced against the subjectivta factors of ethics and public relations. Numerous opinions exist regarding corporate philanjhropy. Friedman [SJ 1ras said that corporations should not be engaged in it at all. In his view, management has no right to disburse funds for other than business-related reasons. To do otherwise usurps the right of the individual stockholder to decide if and how he wishes to dispose of his funds ph:ilanthropically. Others take exception to this thinking and recommend extensive corporate participation in philanthropy. Most people’s opinions fall somewhere between these extremes. The divergence of opinion leaves management without even a theoretical framework for guidance, much less with hard answers. The suggestions presented here do not resolve the normative question of to what extent, if at all, corporations should be involved in philanthropy, but they do provide guidelines for managerial action. Corporate philanthropic expenditures erode the amount of earnings available for distribution to stockholders and for retention in the company. Moreover, no special skills or training are needed to m&e philanthropic determinations. It is condescending to hold that managers are better judges of the proper uses of funds for beneficient purposes than are the corporate owners. In the absence of stockholder guidance, how do managers know the total amount of funds the owners’ wish to relinquish for philanthropy during a period of time? Even if &eY knew &is, how would they know where to allocate the tithe? Should it go to charities to training of the hard-core unemployed, to the chief executive’s alma mater, to some combination of these-and in what bviously, irdividual V&ES and preferences are central proportions?

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to making these decisions, But whose values and preferences? Clearly, the answer is those of the people or institutions whose money is being contributed or used-that is, the stockholders. Since boards of directors are the only corporalte officials directly chosen by stockholders, major philanthropic determinations should be made at this level in the organizational hierarchy, Such a policy, of course, already is observed in most corporations. However, because of the subjectivity in philanthropic decision making, and because these decisions erode stockholder wealth, it seems that stockho!ders should have considerable say in making them. Philanthropic decisions truly representative of stockholders’ preferences would be facilitated if inputs from the stockholders were available to corporate board members”. These inputs are easily obtainable. The same companies which conduct research, in order to assess consumer desires, can surely determme and fulfill stockholder wants concerning philanthropic uses of their money. In companies where the number of stockholde.rs is not extensive, it would not be inordinately expensive to hold a periodic referendum, via controlled mail balloting, on proposed philanthropic expenditures. Ballots could be distributed as of some record date, as is done in distributing dividends, and each share of st#ock outstanding would be worth one vote. There are several ways the plebiscite could be conducted. For example, stockholders could vote and select one level of social 1 percent of estimated pretax *earnings-from expenditure-e.g., several proposed expenditure levels submitted to them by the board of directors. The funds then would be apportioned on the basis of the number of yes votes received by each philanthropic cause listed on the same ballot. There is some precedent for this approach. University alumni associations often ask contributors to designate where-in terms of athletics, college of business, and so forth-their donations are to be used. The benefactor both sets the size of his donation and specifies its intended recipient. In corporations with large numbers of stockholders the cost of taking a census would be prohibitive. Nevertheless, views representstive of those of the stockholder population could be obtained through randam sampling, stratified to ensure representation of the opinions of holdezs of large blocs of stock. For exa;mple, in 19X AT&T managers visited 50,000 randomly chosen stocklholders to discuss company operations; since 1956, the company has contacr.ed over a million stockholders for this purpose [ 14 J. Such a procedure could easily be expanded to cover matters of corporate social responsibility. The suggested system does not divest boards of directors of the ultimate authority for making philanthropic decisions, but enables

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Responsibility

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them to make decisions consistent with stockholder desires. In ad the system fosters accountability in thcot frivolous expenditures those: excessively beneficial to one cause woul likely be pared philanthropic budgets submitted to stochholder scrutiny.

OI from

The business community’s commitment to the philaaophy of corporate social responsibility is not moribund. C”;Ithe cocrtrary, it has been shown that the commitment is growing _fkmer. Management has sucI ceeded in operationalizing the philosophy through the institutjonaljzation of the necessary social programs. owever, Levitt’s concept of “sensible welfare” is being resurrected. anagement. is becoming more selective in the social endeavors it undertakes. Costly projects oufdc companies’ normal spheres of operations are being curtailed or & njnated in anticipation of future capital requirements. Programs CQE~Ypatible with existing corporate capabilities are being adopted. The premise in this article has been that the proper criteria for managers to use in determining whether or not to commit corporate resources to a particular activity are: Is it legal? Is it ethicaf? What effect will it have on profits ? Only after stockholder guidance is obtained should earnings be alllocated for philanthropic purposes. IPost managerial decisions having the denouement of detracting from earnings are uafair to stockholders and to society at large. Recent commen:ary by Drucker underscores this pov?t. Writing about the very real threat to the free enterprise system posed by the economic illiteracy of the American public, especially businessmen, he states: businessmen owe it to themselves and owe it to society to hammer h&e that there is no such thing LPSprofit. There sire only costs: costs of doing business and costs of staying in Eirsiaess; costs of labor and raw materials, and costs oi capital; costs of today’s jobs and cazslts of tomorrow’s jobs and tomorrow’s pensions. . . . There is no conflict between profit and social responsibility. TS earn enough to cover th:: genuine costs which only the so-crrlled profit can cover, is economic and social responsibility-indeed it is the specific s.ocial and economic It is not the business that earns a profit responsibility of business. uenuine costs of capital, rto the risks of tomorrow and adeqrlate to its b to the needs of tomorrow’s worker and petGoner, that “rips off’ zociety. It is the business that fails to do SO [2 :151 l

enough Executives

Perhaps, for a while,

social responsibility.

interest has been devoted to corporetc

readily acknowledge that their carporations have social obligations and are doing much to fulfill *emManagements’ attell-tionnow needs to be refocused on the major social that is: earning so-called *profits--- ~(4 &at responsibility of bt

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the costs of ancillary social responsibilities can be met, today and tomorrow. Concomitantly, businessmen and academicians need to educate the citizenry, public officials, and most of all themselves about the fallacy of profits to which Drucker refers. It is indeed time for action when a 1975 national survey [13] finds that a majority of the American public not only vastly overestimates the true magnitude of after-tax corporate earnings, but also feels that government should impose limits on them.

References 1. “A Social Lapse.” Wall Street Journal, 17 January 1975. p. 10. 2. Drucker, Peter F. ‘The DeIusion of Profits.” Vu11 Street Journal, 5 February 1975. 3. Engei, James F.; Kollat, David T.; and Blackwell, Roger D. Consumer B&z&r. New York: Holt, 1973. A Ernst and Ernst. SO&~! Responsibility Disclosure in 1974 Fortune NO Annual Reports, Cleveland: Ernst and Ernst; 1975. 5. Friedman, Milton. Capitalism and Freedom. Chicago: IJniversity of Chicago Press, 1962. 6. Friedman, Milton. ‘“Anti-Semitism and the Great Depression.” Newsweek (December 16, 1974) : 90. 7. Hoffman, Gene. “The Baker Scholar at Westinghouse.” YLPA (July-August, 1975) : 34.40. 8. “How Social Responsibility Became Institutionalized.” Business iWeek (June 30, 1973) : 74.82. 9. Levitt, Theodore. “The Dangers of Social Responsibility.” Hurv,ard Business Review (September-October, 1%8) : 4150. 10. Miller, Merle. Plain Speaking: An &al Biography of Harry S. Truman. New York: Berkley 1973. 11. Searby, Frederick W. “Return to Return on Investment.” Harvar,d Business Review (March-April, 1975) : 11319. 12. WaEl Street Journal, 16 January 1975. 13. Wall street Journ&, 19 June 1~75. 14. WaZ Street Journal, 9 October 1975.