Should businesses take responsibility for their negative environmental, social and economic impacts?
To answer this question, let us begin by examining what these impacts are.
Under environmental impact, we could name pollution, consumption of resources and land conversion. Examples of social impacts are safety and health hazards, stress, or strains in personal or family relationships. To name a few, economic impacts may include road congestion, rapid urbanisation and inflation.
Should businesses be responsible for reducing these impacts?
Social responsibility from two perspectives
Milton Friedman (1970) and Lord Holme of Cheltenham (1999) shared the same view that companies are responsible for maximizing profits and increasing value for their shareholders. However, their views differ on how companies should do this.
Friedman advocated that companies “make as much money as possible while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom.” By this, Friedman means that the social responsibilities and the extent to which businesses exercise them should cover only those dictated by law and by ethics. Some of the impacts cited above are covered by legislations, while some are not. Let’s take the impact on water resources, for example. While businesses are required by law to control effluent concentrations, they are not required by law to limit water consumption. In Friedman’s terms, businesses would be compelled to address the former, but not the latter. In other words, businesses should not reduce their negative impacts unless required by law. But, is this correct?
Holme, on the other hand, advocated that it is in the long-term strategic interest of the shareholders that companies are able to do business in “stable, harmonious, healthy, educated, free and law-abiding societies.” To do this, companies should foster a responsible approach that “embraces other key constituencies with whom management deal: employees, customers, suppliers, partners, the local community, the wider society and its governments.”
Holme recognized the merit of obeying the law, but he suggested that companies move beyond it to encompass stakeholder relationships. Using the same example on water resources, Holme’s ideal companies would consider water a valuable resource that it shares with the community. Hence, they would both conserve it and control pollution.
How much responsibility?
Holme’s idea of a socially responsible business sounds like a great one, doesn’t it? But to what extent should a business assume responsibility? Recognising and embracing too many stakeholders may make the business vulnerable to conflicting interests of different groups. Multiple stakeholders may pull the business into opposite directions. Wouldn’t this be the antithesis of a society that Holmes needed for a profitable business? Friedman asked that should a business indeed have social responsibility, “how is [it] to know what action of [it] will contribute to that end?”
To this, Holme proposed that businesses should have a “driver for its own giving and partnership programs.” Such programs should be “part of a focused and targeted plan to deliver the company’s responsibilities to its stakeholders and neighbors – and are therefore in the long-term interest of the shareholders.” It means that business should first identify a problem that it shares with society. Addressing this problem should be beneficial to both parties – a win-win solution. Again, let’s look at water resources in production use. Any action that would reduce the consumption of water and will return the investment is worth doing. Why? It would improve water use efficiency and drive down production cost. This will lead to higher profits and better returns to shareholders. To society, this would mean reduced water withdrawal and more water in the future. To do this, the business would need to align its plans with government programs on water conservation, engage with watershed communities, and seek expertise from efficiency consultants. Often, this is communicated to all stakeholders, including consumers and customers. In so doing, the business enables society to see it as a responsible entity – that it is not only after profits, but also after social welfare.
How much is too much?
However, what if the negative impact does not concern the business at all? For example, let’s look at rapid urbanization especially in developing countries. The existence of a company in an area causes service industries, like banks and logistics enterprises, to crop up around it. This boom encourages migration into the area for employment. As a result, the local population may grow at a rate faster than the government is could build (and afford) infrastructure. In many developing countries, private companies sponsor the construction of school buildings to accommodate the growing school age population in their immediate communities. Unlike the earlier example on water, the company’s expenditures on building classrooms do not have a direct effect on its operations. A tangible return on investments cannot be calculated.
Why is a company spending for a school building? The government is supposed to be providing the infrastructures using the taxes it collects. Given the laws of tax deductibility of corporate charitable contributions, Friedman argued that if it does this, the company is “in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.” The company is said to be playing the role of the government, something that it is not qualified nor mandated to do. If this action undermines the principles of democracy (e.g. taxation with representation), why is it allowed in a democratic system? Viewed the other way, if the government prohibits companies from donating to worthy causes, wouldn’t that also be undemocratic?
Holme justified social responsibility undertakings of such type as an action to fill the void left by governments:
“Whether driven by an ideological commitment to privatization, deregulation and liberalization or by an inability or disinclination to raise the taxation necessary to fully fund social programs, there is no doubt that in many countries governments are looking to business to fill the gaps left by their partial withdrawal.”
However, he argued that a company must not attempt to usurp the role of a legitimate government. Further, although it is able to do a lot of good within its locality, it cannot become a vehicle for global diplomacy.
Having no certainty on the driver of the alleged “partial withdrawal” – that is, if it exists – this is a weak justification. However, it is common knowledge that businesses do support communities beyond their legal mandate. But what motivates companies to do this?
This brings us to the next question – what is the motive of ‘social responsibility’?
Social responsibility: a cloak or a strategy?
Friedman’s view on what constitutes social responsibility is purely from a philanthropic perspective – that is, promoting social welfare without expecting anything in return. To him, it is not possible for a business to increase its profits while spending its resources on social responsibility – on engagements it does not expect to receive anything from. It is then not surprising that he considered social responsibility as a cloak under which business hides its real motive of propagating profits while pretending to do good.
While Holme recognized the relevance of philanthropic acts to maintaining relationships, he argued that it cannot be a substitute or a surrogate for social responsibility. Nonetheless, he acknowledged that “the task of maximising shareholder value in the long term can and should only be realized by the management acting responsibly in all its relationships”. In other words, social responsibility is a tool that business could use to fulfill its duties to its shareholders.
Friedman’s and Holme’s articles were written three decades apart. Within those decades, the concept had evolved. Friedman’s view is narrow and outdated, especially on limiting the scope of social responsibility to include only philanthropy. But the intent by which he scrutinized the concept – a concept which has become too loose – is critical to examining the motives of some corporations today which are using social responsibility as a cloak.
The way forward
Having considered these two points of view, we now go back to the initial question: should business take responsibility for reducing its negative impacts?
Assessing which impacts and why they should be addressed is a matter of compliance and ethics. But nonetheless, yes, business must take responsibility. In so doing it ensures its profitability and sustainability. How?
- Exercising responsibility guides a business to adhere with legal requirements. At the very least, a socially responsible business follows the rules and regulations of the community where it operates. This is both a legal and social requirement and is non-negotiable. The business must review all aspects of its operations – labor and wages, health, safety, environment, finance – and check its compliance performance. Any violation will cost the business money, credibility to the government, and credibility to its consumers. The news is not dearth of companies suspended or charged a fine for violation.
- Exercising responsibility promotes efficient and sustainable use of resources with economic returns. Beyond legal compliance, a socially responsible business will acknowledge that it is sharing valuable resources with society and will align its operations to promote its efficient use. For example, recognizing the value of water, Unilever introduced two innovations to the market that encouraged less water use. These were a dry shampoo which refreshes hair without water and a foam handwash which could cut water use by 18%. This does not only put the company in a strong position for innovation, it also positions it as a leader in social responsibility.
- Exercising responsibility enables the business to create positive change within its sphere of influence. In many cases, business actions to social responsibility arise in response to criticisms from today’s consumers and the general public. For example, amid criticisms on unfair labour practices and severe environmental degradation, a group of fashion companies founded Sustainable Apparel Coalition. The coalition aimed, among others, to lead the industry towards a shared vision of sustainability and to identify opportunities for improvements in social and environmental practices throughout the entire supply chain.
A business strategy that aligns social, environmental and economic performance with long-term business value is tied to long-term value creation for both business and society. Social responsibility promotes respect for a company and some research show of its potential to improve profits. If the responsibility of business is to its shareholders first, as Friedman argued, then it should be right that business engage with society responsibly as Holme suggested.