What Does it Mean to Say a Corporation Has Social Responsibilities?

This is the first of a two-part blog on corporate social responsibilities (CSR). In this blog I look at the definition and various perspectives on just what it means to say a corporation has social responsibilities and new regulations passed by Congress to rein in corporate misbehavior. In the next blog I will examine the actions of US companies that make decisions designed to minimize global taxes from the perspective of social responsibility and the ethics of such actions.

Milton Friedman is widely credited for initiating a discussion about CSR. In his seminal piece on this topic that was published in The New York Times Magazine on September 13, 1970, Friedman challenged the idea that businesses had responsibilities beyond maximizing profits for the benefit of shareholders. In his book Capitalism and Freedom, Friedman posits that "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

I have no qualms with that statement but I do feel corporate America today, and their Republican friends, are turning a blind eye to the deception and fraud that has permeated the business world for the past fifteen years. Businesses such as Sunbeam, Lucent, Micro Strategy, Enron and WorldCom, all engaged in fraudulent financial reporting during the late 1990s and early 2000s. The financial meltdown of 2008 was due in large part to fraudulent banking practices including disclosure fraud whereby commercial banks and financial institutions created structured financial assets that were ultimately sold to investors without disclosing the risks of such investments. Fraudulent loan-granting practices contributed to the collapse of the real estate market and general malaise in our economy. The inescapable conclusion is that even by Friedman’s restricted definition, corporate America has not met its social responsibilities.

Friedman did not buy into the spreading belief during the 1970s that business should not be concerned merely with profit but also with promoting desirable “social” ends; that business has a 'social conscience' and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and other socially desirable goals. John Mackey, the founder and CEO of Whole Foods, disagrees with Friedman. In a 2005 piece published in Reason magazine, Mackay argues against Friedman’s limited view and emphasizes the humanitarian dimension of capitalism. He believes a corporation should try to create value for all of its constituencies. While acknowledging the mantra of profit maximization for the benefit of investors as the driving force behind capitalism, Mackey points out that is not the purpose for other stakeholders--for customers, employees, suppliers, and the community. Each of those groups defines the purpose of the business in terms of its own needs and desires, and each perspective is valid and legitimate.

According to the Corporate Social Responsibility Network, CSR is about how businesses align their values and behavior with the expectations and needs of stakeholders - not just customers and investors, but also employees, suppliers, communities, regulators, special interest groups and society as a whole. CSR describes a company's commitment to be accountable to its stakeholders by managing the economic, social and environmental impacts of their operations to maximize the benefits and minimize the downsides.

Some have argued that the discussions of the "social responsibili­ties of business" are notable for their analytical looseness and lack of rigor. According to this view, only people can have responsibilities not businesses that are artificially-created entities. If we accept that assertion as being true, then it is not that far of a stretch to claim that top management has social responsibilities as flesh and blood representatives of the corporation. The decisions and actions of top management potentially affect all stakeholder groups. We need look no further than the aforementioned entities whose actions negatively affected employment, the well-being of communities, and equity in the stock market.

This brings me to my main point. Time and time again I hear Republican candidates for the Presidency lay blame for our stagnant economy on the Democrats because of the burdensome regulations imposed on businesses. In particular, Republicans like to point to the Sarbanes-Oxley Act and the Dodd-Frank Financial Reform Act as creating business uncertainty and regulatory burdens that negatively affect business’ willingness to create new jobs in America; instead corporations expand their global operations.  

In a previous blog I made the case for increased regulation due to the narcissistic behavior of some on Wall Street. The Republicans seem to have short memories and are in denial as to the main cause of our economic woes. The public has lost billions in wealth as measured by losses in investments, retirement funds, and their home equity. Little regulation existed at the time to curtail risky behavior and corporate fraud including misleading and deceptive disclosures on real estate transactions. The expansion in business regulation is directly the result of unethical activities by corporate America with the result being Sarbanes-Oxley and Dodd-Frank. In short, corporate America has no one to blame but itself for the “over-regulation.” 

Blog posted by Steven Mintz, aka Ethics Sage, on August 24, 2011