This paper seeks to critically evaluate the statement that that there is only one social responsibility of business – to use its resources and engage in activities designed to increase profits. This paper will see the application of this statement in the experiences of some companies in the real world in the way that they will make their decisions.
Analysis and Discussion
What are the objectives of a company?
A company is put up basically to address human needs and wants. In economics, these needs and wants are unlimited but resources to satisfy them are limited (Samuelson and Nordhaus, 1992). Business entities are therefore created to these satisfy and needs and wants with the motivations for profit. Since resources are limited there are competing uses of these resources; thus there is the concept of opportunity cost which is the cost of benefit for one for choosing one alternative. Business entities therefore could not afford to go into satisfying needs and wants just to lose their capital in the process.
They will have to strive to aim that their capital should increase after some time, thus they have profit objective. They need to know too the extent of their success from financial point of view which is called wealth maximization (Bernstein and Fabozzi, 1997; Brigham and Houston, 2002).
To illustrate, the requirement to meet the objective of profit, the case of Toyota Motors’s changing its strategy may be considered here. Toyota had started manufacturing hybrid cars not long as a way of responding to changing needs of customer for more gas-efficient cars.
This is supported by the fact of increasing fuel prices. The primacy of the corporate profit as objective in Toyota experience may be viewed from the fact the if it will not change strategy it may suffer what its US competitors General Motors, Ford and Chryler have met – that is to keep idle truck plants while laying off a big number of their workers (New York Times, 2008).These US companies cannot disregard profit as an objective. Since Toyota responded earlier, no wonder the company is still in good financial status (Toyota Motors, 2008).
Watson and Head (2004) could readily confirm this business objective while providing activities in the field of corporate finance which is concerned with the efficient and effective management of the finances of an organization in order to achieve the objectives of that organization. The finance function indeed involves planning and controlling for the provision of resources, the allocation of resources and in finally controlling of resources. With its fundamental aim optimal allocation of the scarce resources available to companies, it has its foundations in economics on law of supply and demand.
The discipline of finance is normally associated with that of accounting and for which reason financial managers do need to have a firm understanding of management accounting to make decisions and also a good understanding of financial accounting to know of how financial decisions produce their results (Meigs and Meigs, 1995; Watson and Head, 2004). In evaluating Toyota Motors, a profitable operation, a liquid and solvent position could be extracted from its annual financial statements. (Toyota Motors, AR, 2008). The company’s success lies in meeting customer’s requirements although may have not been foreseen by these customers (Barabba, 2004).
What is Corporate Social Responsibility?
Corporate social responsibility presupposes feeling of concern for others and therefore there is desire to take responsibilities for the effects of business activities to the interest to various stakeholders in business. It is however more than feeling at it involves decisions and actions. These stakeholders may include the customers who are the very reason why the business came into existence because of their demand for a company’s product or service.
Stockholders are part of these stakeholders since they are the ones who provided the capital to start the business entity. Creditors, like stockholders provide also capital to the business by constituting the latter as their agents in business. The managers get into their positions to manage the day to day business because the stockholders have entrusted to the stewardship of the company. In turn, management hires employees who will deliver the goods or service to customers.
Recognizing the they regulate business activities, government as stakeholder comes in the form of ensuring compliance of laws and making it sure that taxes are paid for its operation. While the business exists, the public is considered a stakeholders and it wants to make it sure that the company exist for society by providing what it needs. Although customers are part of the general public, the latter may not be buying products or services but may indirectly be affected or benefited from the operation of the company.
The concept of corporate social responsibility can be meant to address the problems created under the agency theory. Agency theory admits conflict of interests between stakeholders in an organization created as result of agency relationships. The theory has it that managers of the business or the executive officers are considered agents of the stockholders but these people are positioned to tilt the influence in their power.
In another aspect, the shareholders become the agents of creditors since the shareholders are in effect fiduciaries of creditors. Since these relationships are realities in business, there are agency costs in maintaining the balance which must be minimized while attaining the corporate finance objective of wealth maximization of stockholders for the company. Agency theory can therefore be used to explain why companies sometimes do make bad decisions for stockholders and the importance of capital structure.
It must be important and interesting at this point to know what are the possible motivations or goals of managers. First, they want the company to keep growing and maximize its size for by so doing so that they could increase their managerial power. It is therefore not surprising that as a company gets bigger, the organization becomes more vertical as a functional manager may increase the people or sections reporting under him or her. This would in effect increase their power which is the second reason (Watson and Head, 2004). Third, a bigger company is a sign of a stable one and thus this would increase the job security of these managers.
Fourth, connected with longevity of service and increase in power is the desire of managers to increase their managerial pay and rewards. Fifth, managers want their pet projects implemented or prioritized while fulfilling more of their own social objectives (Watson and Head, 2004). The company becomes then an expression of their being until they will almost consider their jobs as their second homes because they would have stayed long with the company. Agents in the persons of managers carry the presumed trust of shareholders and managers may not be monitored at all because of bias of information in favor of these managers who can manipulate the same for being in control of the business.
The concept of CSR must be able to come into the rescue by trying to minimize the agency cost associate with situations created by reason of the agency theory. Thus this could be applied in the case of Sainsbury of UK whether there is effort to reconcile the seeming conflict. Sainsbury appears to be doing something to reconcile the conflict being created in the organization by it’s its adoption of the principles and implementation of corporate governance.
The corporate governance policies of the company allow non-executive directors to check on possible conflict on interests of executive directors in their natural bias to enrich first themselves before the rest of the stockholders. Thus an audit committee consisting of non-executive directors monitors the implementation of internal control procedures and has the externals communicate with them in regard to their hiring to the company so that professional independence is maintained.
The agency problem can also apparent in a financing decision where managers would rather use equity finance rather debt finance despite the fact that equity finance is more expensive than debt finance. Stockholder would choose debt financing since this has the chance of increasing their wealth more while assuming their liability is limited to their stock investment. This can be appreciated in looking into Sainsbury’s debt equity ratios for the fast five years which deteriorated and then improved. As computed, debt to equity ratios reflected 1.49, 1.89, 2.28, 1.20 and 1.05 for the years 2004, 2005, 2006, 2007 and 2008 respectively (MSN, 2008).
The fact that for the years 2007 and 2008, debt equity ratios improved, there were less debt financing compared with previous years of 2004, 2005 and 2006. CSR may enter into the picture by making managers accountable for decisions made on these ratios via the CSR evaluation committee that include non-executive directors as members (Sainsbury, 2008).
Why CSR is important?
The importance of CSR may be very evident in case of Sainsbury as discussed earlier by providing a checking mechanism for possible abuse by the agents under agency theory. In principles, its importance lies in its support to the primary objective of the business as express in corporate finance – that is wealth maximization of stockholders in a sustainable way. The interests of the various stakeholders as mentioned earlier need to be carefully and honestly served, otherwise the company may not be able to continue in existence and thus will be unable to recoup investments that may take longer to realize.
Not realizing CSR is tantamount to not realizing business objectives as these interests need to be satisfied or the stakeholder will cause the early closure of the business entity. With CSR left unfulfilled, unsatisfied stockholders would rather invest in another company that could deliver higher than their opportunity costs and unsatisfied customers would find for alternative ways from other entities to satisfy their needs and wants,
How to engage into a good CSR?
Engaging in good CSR is essentially addressing keeping a balance of the various interests of the stakeholders (Husted and Allen, 2006; Katsioloudes and Brodtkorb, 2007; Doane, 2005) by satisfying them at least substantially and in the order of how they are connected to each other. Since needs and wants started the ball rolling, they must be the first concern of companies by continuously providing good and quality products and services.
Remove the customers’ need and wants or decrease them and there will be a big problem. The stockholders came pooling their resources to put up the corporation to creatively address these needs and wants of customer but they did have other choices in using their limited capital. Their expectations of greater wealth which may be in form of dividends or capital gain must be assured otherwise they may just sell or leave the corporation.
The management hired by stockholders must be given their due by properly rewarding to make them loyal to be agents of these stockholders. The workers must also be paid well by management and treated with almost the same human and other needs that managers may desire. Government must get its taxes well and have good compliance of laws (Lederman, 2007; Max Iv, 2007) to ensure public acceptance of its role of governance and regulation. Environmental, social and economic laws should be obeyed to serve the public continuously well.
Increasing profits while does not come freely, it has to use resources that are limited in supply and which cost a burden from the stockholders. It is therefore the nature of these resources to be further increased as prize for investing to the business organization. Increasing profits must go with activities that provide goods and services that sustainably satisfy the needs and wants of customers who create the demand in the first place. Other stakeholders must get their due to in the process. This paper has clearly shown in the experience of Toyota Motors and Sainsbury that fulfillment of the social responsibility is by using their resources and engage in various activities while aiming to earn profits in the process.
Barabba (2004), Surviving Transformation: Lessons from GM’s Surprising Turnaround, Oxford University Press, New York.
Bernstein and Fabozzi (1997) Streetwise: The Best of the Journal of Portfolio Management, Princeton University Press.
Brigham and Houston (2002) Fundamentals of Financial Management, Thomson South-Western, London, UK.
Doane (2005) Beyond Corporate Social Responsibility: Minnows, Mammoths and Markets; Futures, Vol. 37.
Husted and Allen (2006) Corporate Social Responsibility in the Multinational Enterprise: Strategic and Institutional Approaches; Journal of International Business Studies, Vol. 37.
Katsioloudes and Brodtkorb (2007) Corporate Social Responsibility: An Exploratory Study in the United Arab Emirates; SAM Advanced Management Journal, Vol. 72.
Lederman (2007) Statutory Speed Bumps: The Roles Third Parties Play in Tax Compliance; Stanford Law Review, Vol. 60.
Max Iv (2007) Hand-Holding, Brow-Beating, and Shaming into Compliance: A Comparative Survey of Enforcement Mechanisms for Tax Compliance; Vanderbilt Journal of Transnational Law, Vol. 40.
Meigs and Meigs (1995) Financial Accounting, McGraw-Hill, London, UK.
MSN (2008) Sainsbury Financial Information. Web.
New York Times (2008), Toyota Scales Down production of Big Vehicles. Web.
Sainsbury (2008), Annual Report 2008. Web.
Samuelson and Nordhaus (1992), Economics, McGraw-Hill, Inc, London, UK.
Toyota Motors (2008), 2008 Consolidate Financial Results. Web.
Watson and Head (2004), Corporate Finance: Principles and Practice, Third Edition.