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Company Law

Analysis - guidance - compliance

22 JUN 2015

What responsibilities ought corporations to have towards society?

What responsibilities ought corporations to have towards society?
Anna Hadjimarkou

Corporate Social Responsibility (CSR) has attracted a wide range of conflicting arguments and contradicting understandings as it concerns the various conceptual and normative issues which surround it. The question of what responsibilities ought corporations to have towards society constitutes the heart of these debates and has been approached in a number of different ways over the last decades. As a result, this article aims to address both sides of arguments and by taking into account the different perspectives to support the idea that firms should go beyond the “business case” and the maximisation of profits by adopting the “broad” 1 or “intrinsic”2 version of CSR.

To begin with, it is essential to evaluate the position of Milton Friedman who has been an influential economist and who is believed to be the greatest supporter and the best representative of the idea that a corporation should only be socially responsible to maximise profits for its shareholders. Friedman argues against the “intrinsic” version of CSR - which according to Professor Campbell “its moral salience does not depend on any strategic or instrumental economic value it may have for the corporation involved” 3 - and he further rejects the proposition that corporations should go beyond their economic, legal and ethical custom obligations, by adopting an ethical egoism approach. This is outlined in his book Capitalism and Freedom (1962) and clearly expressed in his well-known article The Social Responsibility of Business is to Increase its Profits (1970), where he places only limited ethical constraints on his theory by saying that corporations should “stay within the rules of the game…[by engaging] in open and free competition without deception or fraud” and that they should conform “to the basic rules of the society, both those embodied in law and those embodied in ethical custom” 4. However, it is important to note that his concept may not be as rigid and unethical as it may seem since these specific limitations do take into account different moral standards such as citizenship, relativism and trustworthiness 5. Nevertheless, when considering the question of what responsibilities ought corporations to have towards society, proponents of the “broad” version of CSR, strongly argue that these constraints are deficient and unsuccessful in promoting corporate social responsibility effectively. The “broad” or “intrinsic” position suggests that corporations should respect and promote moral and ethical values even when this will not lead to the optimum position of profit maximisation 6; something which is convincingly supported by different theories analysed further below.

Furthermore, Friedman’s theory is reflected by the “business case” 7 analysis which expresses the idea of engaging in corporate social responsibility only as long as this benefits the firm and protects its interests. This implies that corporations should only get involved in CSR in order to improve their reputation, to satisfy their customers and employees, to increase the efficiency of the business, to gain greater trust by investors and shareholders, and to become more competitive by securing a strong market position. In this way, it is evident that the “instrumental” version of CSR is promoted and “justified through the benefits that derive to the corporation in question, through such consequences as enhanced customer reputation and shareholder approval” 8.

Moreover, it is important to note that this “instrumental CSR” approach is clearly adopted by UK Company Law and especially by section 172 of the Companies Act 2006. Section 172(1) provides that “A director of a company must…promote the success of the company for the benefit of its members as a whole, and in doing so have regard to” a non-exhaustive list of company’s stakeholders (e.g. community and environment). According to the way the section is expressed and by taking into account the whole framework of the Companies Act 2006, it is evident that an “Enlightened Shareholder Value” 9 approach is adopted. In consequence, directors are required to “have regard to” the various stakeholder interests as long as this “promote[s] the success of the company for the benefit of its members as a whole”. Therefore, it is clear that economic interests remain paramount and directors are not required to run the business in an ethical and morally acceptable way per se. As a result, it can be argued that the Friedman position is implanted to a great extent into the corporate governance scheme adopted by the United Kingdom. However, this does not mean that this is how the situation should continue to be and that an imposition of greater ethical responsibility on corporations should be outrageously rejected. Consequently, the following section aims to effectively confront the main arguments of Milton Friedman and suggest the adoption of the broader “intrinsic” approach to CSR.

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Firstly, one of the most powerful arguments expressed by the “instrumental” version of CSR and especially by Milton Friedman, is the fact that corporate executives constitute the agents of shareholders and therefore they cannot engage in any activity which threatens their principal’s interests and their moral right to property10. It is submitted that if a director engages in the “intrinsic” version of CSR, then “he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other”11. Also it is argued that the agents’ “responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible”. However, despite the fact that Friedman’s assertions may be valid in some situations, things cannot always be evaluated in this way. In recent years, many stockholders have shown an interest towards corporations which follow more ethical approaches and which run their businesses by engaging in broader CSR12. It is wrong to assume that shareholders’ desires solely focus on profit maximisation and that they condemn all activities which are correlated with ethical constraints beyond those imposed by Friedman. It is not realistic to assume that all stockholders will agree to the pollution of the environment or to the violation of human rights and especially of the right to life, as necessary preconditions for their profit maximisation. Nonetheless, even if they do agree, they should be morally accountable and the ones to bear the cost and the moral responsibilities13. It is suggested that according to the moral standard of core ethical values (such as caring, responsibility and citizenship), if a corporation carries out activities which are immoral and unethical, and shareholders do approve of these actions -which cause unnecessary harm and which do not respect others’ feelings, the environment and the community in general- they should be the ones responsible for the actions of their agents (managers). This moral standard has been characterised as “‘common morality’14 in that basic ethical values are understood and accepted to be applicable to everyone”15;  something which reinforces the idea that shareholders should be morally accountable for the unethical actions they approved.

Secondly, it is suggested that the idea of profit maximisation adopted by Milton Friedman leads to the maximisation of social utility and in consequence, to the adoption of a utilitarian approach. It is argued that the achievement of profit maximisation will lead to “the greatest good for the greatest number” 16 since firms will be able to efficiently produce benefits to the different stakeholders of the company and in general to all those affected either directly or indirectly by its decisions and acts17. However, this article aims to prove that according to utilitarianism (teleological theory which focuses on the effects of an action), we must adopt the broader “intrinsic” version of CSR and as a result, reject the arguments supporting a profit maximisation approach. Friedman’s thesis is deficient in defining utilitarianism as advocated by Bentham and Mill, and as a result in realising the maximisation of social utility which implies the achievement of the greatest net happiness and pleasure for that part of the society affected by the firm’s actions. According to Schwartz, “…substantial harm to society (including loss of life) can be, and has been, the result when Friedman’s approach is strictly applied.”18 For example, Friedman might have allowed an asbestos factory to have the minimum standards of safety as long as this was legal, and the fact that many people would die each year from mesothelioma (asbestos disease) would not have affected his decision. As a result, this approach can certainly have disastrous effects and dreadful consequences, leading to unethical outcomes and enormous harm. Therefore, it is convincingly submitted that social utility can only be maximised if Friedman’s suggestions are abandoned and the “intrinsic CSR” is adopted.

Thirdly, it should be noted that corporations benefit from society in various ways and as a result, according to the social contract theory developed by John Rawls 19, they must give something back. Social contract theory “is the view that persons’ moral and/or political obligations are dependent upon a contract or agreement among them to form the society in which they live”20. In his book A Theory of Justice (1971), Rawls adopts a theory based on impartiality and on a hypothetical agreement which produces fair principles of justice for everyone. His conceptions of the “original position” and the “veil of ignorance” reinforce this result and enhance the idea of societal justice. In principle, Rawls wants to create a framework which will improve everyone’s position and especially protect those people who are worse off in society. As a result, it can be firmly suggested that in order to achieve societal justice and in consequence, to follow the social contract theory, corporations should always engage in “intrinsic CSR” and go beyond the “business case” by adopting broader social responsibilities. Firms should account to the society for all the negative externalities they create21 and as part of the community they must accept their obligations; there should be reciprocity between firms and all other citizens of the society.

In conclusion, it is evident that the idea of corporations engaging in broader corporate social responsibility attracts a lot of different and convincing justifications which successfully reject Friedman’s arguments on profit maximisation and the “business case” analysis. In this new modern era of ethical and environmental concerns, where the protection of human and moral rights is constantly promoted, an opposite conclusion would have been unrealistic and unreasonable. Corporations must adopt the “intrinsic” version of CSR which entails going beyond their legal obligations and be held morally and ethically accountable for negative externalities caused.

1 Schwartz, Mark S. (2011), “Corporate Social Responsibility: An Ethical Approach”, Broadview Press, Chapters 2 & 3.

2 Campbell, Tom (2012), “Corporate Social Responsibility: Beyond the Business Case to Human Rights” and other essays in Wesley Cragg, (ed), “Business and Human Rights”, Edward Elgar, pp. 47-73.

3 Above fn.2, p.47.

4 Friedman, Milton (Sept 13, 1970), “The Social Responsibility of Business is to Increase its Profits” The New York Times Magazine: 32-33, 122-26, in Cragg et al (2009), 31-36.

5 Above fn.1, p.55.

6 Above fn.3.

7 Cragg, Wesley (2004), “Human rights, globalisation and the modern shareholder owned corporation”, in T. Campbell and S. Miller eds, “Human Rights and the Moral Responsibilities of Corporations and Public Sector Organisations”, Kluwer, 105-27, pp. 123-6.

8 Above fn.2, pp.47-48.

9 Fisher, Deryn (2009), “The enlightened shareholder - leaving stakeholders in the dark: will section 172(1) of the Companies Act 2006 make directors consider the impact of their decisions on third parties?” I.C.C.L.R. 2009, 20(1), 10-16, pp.5-6.

10 Above fn.4, pp.31-33.

11 Above fn.4, p.32

12 Schwartz M.S., Tamari M., and Schwab D. (2007), “Ethical Investing from a Jewish Perspective”, Business Society Review 112.1: 137-61.

13  Ibid.

14 Beauchamp T.L., Bowie N.E., and Arnold D.G. (2009) “Ethical Theory and Business”, 8th ed. (Upper Saddle River, NJ: Pearson-Prentice Hall), 35-38.

15  Above fn.1, p.30

16  Bentham, Jeremy (1907) “Introduction to the Principles of Morals and Legislation, Oxford: Oxford University Press.

17  Above fn.1, pp.56-58.

18  Above fn.1, p.61.

19  Rawls, John (1999) “A Theory of Justice”, Harvard University Press.

20  Internet Encyclopedia of Philosophy, http://www.iep.utm.edu/soc-cont/

21 Above fn.1, p.63: Schwartz: “…paying corporate taxes is not sufficient to pay for all the negative externalities that firms cause and for which they are not held accountable (i.e., there is a lack of proper reciprocity).”