Smart Business Study

Social Responsibilities and Ethics

Society has become increasingly aware of the interdependence between business and its environment. Business organizations are no longer viewed as totally private bodies free to pursue their own goals. Instead, they are increasingly expected to contribute to the betterment of society. Managers are no longer considered to have responsibility only to the owners. Rather managers are increasingly held accountable for the social effects of their actions. For example, the Government of India has indicted Warren Anderson, President of Union Carbide Corporation, for the Bhopal Gas disaster. As business firms grow in size and power, society expects more from them.

Reasons for Growing Concern for Social Responsibilities

Several forces have led to the increasing concern for socially responsible business behavior. Some of these forces are as follows:

  1. Consumerism: Growing consciousness among consumers about their rights, the establishment of consumer groups, and consumer protection laws have given rise to the dictum “consumer is the king”. Businessmen have been forced to care for the interests of consumers.
  2. Trade Unionism: The growing power of trade unions and labor laws has led businesses to be concerned with labor welfare.
  3. Public Opinion. Public opinion and the threat of government control have made businessmen realize that responsible behavior is essential for the preservation of free enterprise. If the business does not accept social responsibilities, it would be forced upon by the government.
  4. Enlightened Self-interest: The spread of education has led businessmen to be concerned with the quality of life. Many of them recognize that business is a reflection of social objectives and values and an agency for promoting them.
  5. Professionalization: Separation of ownership from management in the large corporation has replaced “owner-manager” with “paid manager”. Ownership has become diffused in large companies. Managers having no stock in ownership tend to take a long-term and more responsible view of their role.
  6. Trusteeship: The trusteeship principle suggests that business managers should be caretakers of their property holding it in trust for the society as a whole. The more fortunate members of society assist their less fortunate brothers.

Concept and Nature of Social Responsibility

The term social responsibility is defined in various ways. Some people define it as the responsibility of a business to perform its basic economic function of producing and supplying products and services in the most efficient manner so as to maximize profits. Others define it as the obligation to consider the interests of society while performing its economic function. Still others view it as philanthropic and charitable activities to promote education, health, employment, rural employment, rural development, and other social causes.

In fact, social responsibility implies a responsibility to society beyond the basic economic responsibility of efficiency and profitability. As an economic agent of society, a business enterprise must use its economic power to protect and promote public interests and social values.

Social responsibility transcends legal obligations and it is on a voluntary basis for the genuine benefit of the society. In the words of Drucker, “Social responsibility requires managers to consider whether their action is likely to promote the public good, to advance the basic beliefs of our society, to contribute to its stability, strength, and harmony.”

The concept of ‘social responsibility’ needs to be differentiated from social obligations and social responsiveness. Social obligations imply the typical activities of an organization directed in response to market forces and internal aspirations. Such behavior has been criticized as being too narrow and insufficient for the long-term success and survival of most organizations. Social responsibility is much broader as it requires an organization to meet the expectations, norms, and values of society. Social responsibility relates to current issues whereas ‘social responsiveness’ is anticipatory in nature. A socially responsive organization is expected to anticipate changing or emerging social problems and respond to them.

According to Keith Davis, “Social responsibility is the obligation of the decision-makers to take decisions which protect and improve the welfare of the society as a whole along with their own interests. “Every manager owes an obligation to make the public good the private good of the enterprise. Andrews has given a broader view when he observes “By social responsibility, we mean the intelligent and objective concern for the welfare of the society that restrains individual and corporate behavior from ultimately destructive activities, no matter how immediately profitable, and leads in the direction of positive contribution to human betterment, variously as the latter may be defined.”

This view of social responsibility has several implications:

  1. The neutral and negative aspects of personal behavior are as important as the positive. An individual manager may not support a trade union but he has no right to destroy it.
  2. Social obligation is a personal attitude. An organization can discharge its social responsibility only through the individuals who manage and control it.
  3. Social responsibility is an interpersonal and reciprocal relationship. Just as a company owes responsibility to social groups, every social group is, in turn, responsible to the company. It should develop attitudes and policies favorable to business.  
  4. The social responsibility of a manager needs to be commensurate with his social power, i.e., the power to influence society.
  5. The standards of social obligations can be fixed while keeping in view social norms and expectations. Therefore, the extent of these obligations may differ from society to society.
  6. The concept of social responsibility is not inconsistent with the profit objective. An organization cannot fulfill its social obligations unless it survives and grows. No business can survive without earning profits. Similarly, no business can earn profit in the long run without providing some useful service to society.                      
  7. shell responsibility is a continuing obligation. Any business enterprise remains responsible to society throughout its continued existence. An organization has to ensure at all times that its decisions and operations meet the needs and interests of society.

The Case for Social Responsibility

The rationale for assuming social responsibility lies in the following arguments:

  1. Coalition: A business organization is a coalition of several interest groups or stakeholders, e.g., shareholders, customers, employees, suppliers, etc. Businesses should, therefore, work for the interests of all of them rather than for the benefit of shareholders alone.
  2. Creation of Society: Business is a sub-system of society. It draws support and sustenance from society in the form of inputs. Socially responsible behavior is essential to sustain the relationship between business and society.
  3. Social Impact: During the course of its functioning, a business enterprise makes several decisions and actions. Its activities exercise a strong influence on the interests and values of society. Businesses must fulfill social obligations as compensation for undermining the legitimate interests of society.
  4. Social Power: Large corporations have acquired tremendous social power through their multifarious operations. Social power may be misused in the absence of social responsibility. Social power and social responsibility must be balanced, when an institution’s power grows, its responsibility grows accordingly. According to Keith Davis, “In the long run, those who do not use power in a manner that society considers responsible will lose it. This is the iron law of responsibility”.
  5. Legitimacy: It is in the enlightened self-interest of business to assume social responsibility. Social responsibility legitimizes and promotes the economic objectives of the business. By improving social life, businesses can obtain better customers, employees, and neighbors. Social responsibility is thus good citizenship as well as good business.
  6. Competence: Business organizations and their managers have proved their competence and leadership in solving economic problems. Society expects them to use their competence to solve social problems and thereby play a leadership role.
  7. Free Enterprise: If the business does not voluntarily assume social responsibilities government will force it to do so through regulation and control. Failure to discharge responsibility will eventually result in the death of private enterprise. It is better to behave in a socially responsible manner and thereby avoid government control.
  8. Professional Conduct: Professional managers are required to display a keen social sensitivity and serve society as a whole. Social responsibility is one of the professional demands on managers.
  9. Public Image: Adoption of social responsibility as an objective will help to improve the public image of business. A good public image is a valuable asset for business.

The Case against Social Responsibility

Critics of the social responsibility concept put forward the following arguments:

  1. Vague Concept: The concept of social responsibility is very vague and amenable to different interpretations. There is no consensus on its meaning and scope. In such a situation, it would be futile as well as risky to accept social responsibility.
  2. Dilution of Economic Goals: By accepting social responsibility, businesses will compromise with economic goals. A business is an economic institution and its only responsibility is to make maximum possible profits for its owners. It would endanger its economic viability by accepting any other responsibility.
    • In the words of Milton Friedman, the social responsibility of business is a ‘subversive’ doctrine.
  3. Lack of Social Skill: Business organizations and their managers are not familiar with social affairs. There are specialist social service organizations such as the government which can better deal with social problems.
  4. The burden on Consumers: If a business deals with social, the costs of doing business would increase. These costs will be passed on to consumers in the form of higher prices or will have to be borne by owners. This would be taxation without representation.
  5. Responsibility without Power: Business organizations possess only economic power and not social power. It is unjust to impose social responsibilities with social power. If business is allowed to intervene in social affairs it may perpetuate its own value system to the detriment of society.
  6. Misuse of Responsibilities: Acceptance of social responsibilities will involve the diversion of precious managerial time and talent on social action programs. It may result in misdirection of valuable corporate resources. 
  7. Lack of Yard-Stick: Profitability is the common criterion for decision-making in business. Tempering it with social responsibility would make the decision-making process quite complex and controversial.
  8. Improper Role: The proper role of a business is to use its resources and energize efficiently so as to earn the best possible return on investment within the confines of law and ethics. Businesses should concentrate on economic performance leaving social service to other organizations.
  9. Already Responsible: Business organizations are already serving society by providing goods and services, generating employment, developing technology, and contributing to public exchequer through tax payments. It would be unjust to our burden them with further responsibilities.
    Public opinion is in favor of the assumption of social responsibilities. In fact, the question today is not whether or not to accept responsibilities but how much responsibilities to assume.

Profit Motive and Social Responsibility

There is an impression that profit motive and social responsibility are inherently contradictory to each other. This is far from being true. Economic goals and social responsibilities of business are complementary to each other and reinforce each other. Business firms are primarily economic institutions and if they fail to earn profits, they will not survive for long. Successful economic activity is thus a firm’s social relevance. Profit, the main economic goal, serves as a stimulant to hard work, initiative, and risk-taking. It is an overall measure of the social contribution of a business through its economic performance. An enterprise that earns economic surplus improves its capability to serve society. Thus, profit contributes to public interest and social welfare.

Similarly, the social responsibilities of business contribute to the economic viability and performance of business enterprises. In the short run, expenditure on social action programs may reduce the amount of profit. But in the long run, such expenditure improves the socio-economic environment of business. For instance, when a business enterprise contributes to the education and health of the community, it can get more competent and healthy employees. Similarly, by contributing to the well-being of people, a business enterprise can enlarge the market for its products and services. Thus, there is no inherent conflict between the profit motive and the social responsibility of business.

Criteria for Socially Responsible Decisions

  1. No action should be taken to erode the profit motive of the business.     
  2. Businesses should focus on long-term interests not on short-term profits while taking social actions.         
  3. There is no readymade formula for socially responsible decisions. An organization will be guided by the values of its top managers.
  4. Businesses should exercise Social Responsibility in proportion to their social power.
  5. Businesses should not be expected to take actions that will make it difficult to attract further investment.
  6. Social problems should be solved by the institutions (business or others) best fitted to deal with them.

Responsibilities Towards Different Groups

The scope of social responsibilities of business is very wide. The responsibility is manifold and extends to all those who have a stake in business. To be specific, the management of a business enterprise is responsible to

  • the inside group consisting of shareholders and employees; and
  • the outside group comprising customers, suppliers, the government, and the community in general. These internal and external responsibilities of business are explained below 👇
  1. Responsibility towards Shareholders:
    • a fair and reasonable return on investment;
    • safety of investment;
    • steady appreciation of investment; and
    • regular, accurate, and full information about the working and progress of the company.
  2. Responsibility towards Employees:
    • fair wages and salaries;
    • good and safe working conditions with job security;
    • adequate service benefits such as housing, medical facilities, insurance coverage, and retirement benefits;
    • recognition of workers’ rights to form trade unions, to collaborate in bargaining and strike;
    • opportunities for education, training, and promotion.
    • workers’ participation in decision-making; and
    • Religious, social, and political freedom.
  3. Responsibility to Customers :
    • a regular supply of the right quality goods at the right time and right place;
    • Charge reasonable prices;
    • Supply goods that meet the needs of different classes and tastes with different purchasing power;
    • prompt, adequate, and continuous services;
    • Prompt redressal of customer’s grievances;
    • true and fair information through advertisements;
    • Avoid unfair and unethical practices like adulteration, hoarding, and black-marketing; and
    • Fair and wide distribution of goods and services among all sections of consumers.
  4. Responsibility towards Government:
    • to abide by the laws of the land;
    • to pay taxes honestly and in time;
    • To avoid corrupting public servants;
    • To encourage fair trade practices, and
    • To avoid Monopoly and concentration of economic power.
  5. Responsibility towards Community :
    • To make the best possible or efficient use of the society’s resources;
    • To provide maximum possible employment opportunities;
    • To keep the environment healthy and free from all types of pollution;
    • To contribute to the upliftment of the vehicle sections of society;
    • To refrain from indulging in anti-social and unethical practices;
    • To improve public health, education, and cultural life of the community;
    • To promote the development of backward areas and cottage, village, and small-scale industries
    • To provide relief to victims of natural calamities
    • To contribute to social causes like AIDS control, population control, etc
    • To contribute to the overall development of the locality

Reconciliation of Conflicting Interests

The above discussion reveals that business is under pressure from several social groups as shown in the following figure. The interests of these groups are not identical but conflicting. Therefore, it is the task of management to reconcile these conflicting claims.

According to Ernest Dale, “The manager sees himself as an arbiter among the many interests of the public affected by the business: the stockholders, the employees, the suppliers, the local community and the customer. It is his duty to divide the return from the business by providing a fair return to the shareholder, ‘fair working conditions’ and pay for the employees, ‘fair prices’ to the suppliers and customers and to make the business, in general, an asset to the local community and the nation.”

Social Responsibility of Business in India

In India, business by large does not enjoy a good public image. A few leading business houses have made significant contributions to the economic and social well-being of the country. However, instances of adulteration, hoarding, black-marketing, exploitation of workers, tax evasion, and other anti-social practices are very common. In order to ensure freedom of enterprise, businessmen need to be more responsible towards society. The government’s industrial policy states that if industry acquires an increasing sense of social responsibility, the government can concentrate more on measures to help industry rather than to control it. In a mixed economy like ours, the social responsibility of business assumes special significance. The main aspects of the social responsibilities of Indian business are as follows :  

Social Responsibilities of BUSINESS
  • To make the best use of national resources so as to raise the level of national income and standard of living of the people.
  • To create more and more employment opportunities for engineers, technicians, and other skilled persons from educational institutions.
  • To protect the national environment and ecological balance from all types of pollution.
  • To contribute to the economic development of backward regions and weaker sections of society.
  • To recognize and respect social values, business ethics, and cultural heritage.
  • To cooperate with the Government in solving problems like communalism, illiteracy, over-population, concentration of income and wealth, monopoly, etc.

Corporate Social Responsibility (CSR) Under The Companies Act, 2013

The Companies Act, 2013 lays down that every company having a net worth of Rs.500 crore or more, or turnover of Rs.100 crore or more or a net profit of Rs.5 crore or more during any financial year shall spend at least two percent of the average net profits of the three preceding years on socially responsible activities given below:

  • Eradicating extreme hunger and poverty
  • Promoting education
  • Promoting gender equality and empowering women
  • Reducing child mortality and improving maternal health
  • Combating HIV, AIDS, malaria and other diseases
  • Ensuring sustainability of the environment
  • Enhancing employment-oriented skills
  • Social projects
  • Contributions to the prescribed relief funds
  • Such other matters as may be prescribed

Concept and Nature of Business Ethics  

Ethics is derived from the Greek word ‘ethos’ which means a person’s fundamental orientation toward life. Ethics refers to the moral standards used to govern behavior and to determine right or wrong, good or evil. Ethical behavior is the acts consistent with the moral standards or codes of conduct established by society. Ethical standards may change over time and differ from culture to culture. For example, political brides or payoffs may be acceptable in one culture but not in another. Ethical issues are inevitable in business.

Business ethics may be defined as a set of moral standards that people who own and manage a business are expected to follow. These standards are meant to govern the conduct of business persons. Business ethics indicates what is right conduct in business matters. It is the application of moral standards to business decision-making.

The main characteristics of business ethics are as follows:

  1. Ethics is important in all types of business- large or small, manufacturing or service.
  2. Business ethics is above the law. It requires behavior that is socially desirable even if not legally binding.
  3. Ethics is a dynamic term and may change over time.

Need for Ethics in Business 

Ethical considerations are as important in management as in other occupations. In the field of morality, Personal life is not separate from business life. The social dimensions of business ethics cannot be overlooked because many problems arise from the relationship of business to the broader society. Ethical considerations are significant for managers due to the following reasons:

  1. For every individual, the job is the center of life. Unless job values are in harmony with the rest of life, he cannot be a happy and healthy person.
  2. Modern society is an industrial society. Therefore, business values become the values of the society as a whole.
  3. A business executive must take into consideration the moral and social considerations because these are the real motivating factors.
  4. When an organization fails to behave in accordance with social expectations, it may lose not only its image and market share but its very right to exist.
  5. Today, a business manager is expected to serve as a trustee of various social groups. As the trustee, he must observe the ethical values of the society.
MarketingTreatment of customer complaints
AdvertisingTruth of claims
LocationImpact on community and environment
Production Pollution treatment claims
TransportationSafety regulation compliance
AdministrationConcern for social values
FinanceProfits to rercompensate investors
PersonnelSafeguard asstes , Meeting promises to pay Fair traetment in hiring, promotion, dismissal, and pensions
PurchasingAvoid Hording
InformationCredibility, Validity
Ethical influences on Business

Factors Governing Business Ethics

Business ethics has Deep and wide roots in society. Some of the pressure points of ethical behavior are given below:

  1. Value Forming Institutions: the value system of an individual is shaped by various institutions, e.g., family, religion, school, and the government. These Institutions prescribe what is good or bad for an individual. Right behavior is rewarded while wrong behavior is punished. This continues throughout the life of an individual as he acquires certain values through his daily experience in the long run. The influences of these institutions are inter-related. The values fostered by one institution are reinforced by the others. As an organization is an agglomeration of individuals, its values are the collective values of its members. That is why, a conflict may arise between the values of the organization and those of an individual.
  2. Organizational goals: The objectives of an organization influence the values of its members. A business is an economic institution and it must be profitable. The classical economic theory stresses the profit maximization goal. Many times, managers may be forced to compromise their personal ethical values in order to achieve organizational goals. But the goal may be tempered by many values. Leadership, integrity, knowledge and skills, and survival are some of them. All these factors change the goals of an organisation and consequently expected behaviour from its members.
  3. Work and career: Work refers to the job and the tasks or responsibilities associated with it. Career, on the other hand, represents a series of jobs or positions. Each work has its own values and persons performing the work follow these values. For example, salespeople may have different values than engineers. Thus, work and career create special values that give unity, cohesion, and meaning to persons and groups.
  4. Superiors: Most people succumb to pressure from superiors to do things that they may consider unethical otherwise. For example, a secretary may tell a visitor that the boss is out when he is actually in because her boss has told her to do so. Many a time an employee may sign false documents due to pressure from the boss.
  5. Peers and Colleagues: An individual in a workgroup tends to conform to the norms of the group. He does so either to get the approval or friendship of his colleagues. He adopts the attitudes, beliefs, and values of the group to which he is associated. Thus, the behavioral standards of peers and colleagues exercise a significant influence on the value system of an individual. For example, a person may justify some indiscretions on the basis that ‘everybody is doing it’.
  6. Professional Codes: These days three types of codes are available: First, big companies formulate their philosophy or creed to guide the behavior of their employees. The main objective of these documents is to build the company’s image by showing the company’s concern for Ethical behavior in society. Secondly, company policies contain a code to guide actions that have ethical conduct, e.g., no discrimination in recruitment on the basis of caste, creed, sex, or religion. Thirdly, professional bodies have prescribed ethical codes to govern the conduct of their members. In India, the Institute of Chartered Accountants of India, the Institute of Cost and Works Accountants of India, the Institute of Company Secretaries of India, and the All India Management Association (AIMA), etc. have formulated professional Codes. These codes are enforced through fines and even expulsion of erring members. However, such sanction is not very effective in the field of management code because the AIMA does not have the statutory authority to enforce and the majority of managers are not its members.

Accordingly to the Business Ethics Survey Report India – conducted a about ‘the way they do business’. They realise that good ethics is good business too”. The survey suggested the following five steps to develop ethical corporation.

  • Appoint an ethics officer-preferably a respected senior executive who has recently retired from your organization.
  • Involve employees in developing a mission statement, if you already have one, recheck if you need to add ‘ethics’ to it.
  • Evolve a code of conduct and ensure every employee knows exactly how your company likes to conduct business.
  • Facilitate upstream communication from employees by investing in a grievance cell a hotline or an ombudsman.
  • Build an ethical Culture by personal example CEO should stand for chief ethics officer in your company.

Ethical Issues Faced by Managers

Managers face ethical issues concerning different stakeholder groups. These are summarised below:

  1. Concerning Employees: Job security, good working conditions, performance-based rewards, performance feedback, privacy, sexual harassment, and retirement benefits are the main ethical issues concerning employees.
  2. Concerning Peers and Superiors: Loyalty, trust, truth, and support are the main issues.
  3. Concerning Customers: Right quality, fair price, truthful advertising, and questionable practices, are the main issues.
  4. Concerning Suppliers: Fair and impartial treatment, telling the truth, balanced relationships, and pressure tactics are the key issues.
  5. Concerning Other Stakeholders: Truth in public relations, taking care of shareholders’ interests, respecting laws and regulations, pollution, etc. are the major issues.

Meaning of Social Responsibilities and Ethics

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