The Social Responsibility of Business:

A Review.

Maz Demosthenous
School of Commerce
The Flinders University of South Australia
GPO Box 2100
Adelaide South Australia 5001

Telephone: +61 8 82013896

Facsimile: +61 8 82012644
Email: [email protected]

SCHOOL OF COMMERCE
RESEARCH PAPER SERIES: 00-8
ISSN: 1441-3906

For many, the view that the main goal or purpose of business is to make as much
money as possible is accepted as a matter of fact and is beyond debate. To go
further and say that the social responsibility of a business is also just to make a profit
is open to debate.

The aim of this paper is to discuss the various views of the

responsibility of business, and to consider where accounting fits in. In addition, to

explore the ethical responsibilities that a corporation may have beyond making
profits for its stockholders.

The Friedman view

Milton Friedmans view is that in a capitalist economy, there is one and only one
responsibility of business- to use its 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 (Friedman, 1983).
When one is looking at the responsibilities of an individual or an organisation they
must first examine their roles.

The directors of companies have a fiduciary

responsibility to act in the best interest of the shareholders. The managers are agents
of the shareholders and therefore have a moral obligation to manage the firm in the
interest of the shareholders, which obviously is to make as much money as possible
and maximise shareholder wealth.

The shareholders are the owners of the

organisation and therefore the profits belong to them. However, does that entitle the
directors and managers to act in an unethical manner to benefit the shareholders?

According to Friedman (1970), a corporate executive (manager) has a direct

responsibility to his or her employers, and that is to conduct business in accordance
with their desires, which is generally to make as much money as possible. In a
capitalist society it is rare to hear that one has gone into business for reasons other
than to make as much money as possible. The corporate executive is the agent of the
individuals who own the business and their main responsibility is to them. As stated
by Miller and Ahrens (1988), Friedman believes that corporations are a species of
private property and, consequently, that they have exactly the same social
responsibility as other businesses in a capitalist economy, that is, to make as much
money as possible so long as they stay within the rules of the game which is to say,
engages in open and free competition.

Friedman's view to managing business takes the classical perspective. This is an

approach to management that advocates allow the invisible hand of free market
forces, with their allocative and coordinating efficiencies in resource allocation, to
regulate business for societys betterment and to dictate the actions of business. In
its basic formulation, it espouses that the entire social responsibility of a business
entity is to make profits and obey the law (Bartol et al., 1998, p131). This
approach to management contends that it creates the greatest good for the greatest
number, and therefore the government need not intervene.

Other Views
Advocates of utilitarianism would consider the actions of management using this
approach as ethical, because with utilitarianism, the consequences of an action are
considered to be ethical if they provide more good(or benefits) than harm(or costs).
Therefore, Utilitarian reasoning assesses actions by reference to the utility they
generate. This is further narrowed by Financial Utilitarianism whereby the actions
which generate greater financial utility (profits) are considered as better actions than
those which generate less financial utility. Cavanagh (1990) states that cost-benefit
analysis is the dominant criterion in ninety percent of all business decisions. If we
follow Friedmans view that the social responsibility of business is to be profitable,
and furthermore, consequences are measured by costs and benefits, it appears logical
from a utilitarian perspective that the best ethical action is that which maximises
profit (Clark & Jonson 1995, p3).

Ethical egoism can also provide a basis for defending capitalist management
decisions. With this framework, if the evaluation of the consequences focuses solely
on the individual (corporation) long run interest, and the decision results in a greater
ratio of good compared with alternatives, the decision would be considered as
ethical. So increasing the profit of the corporation would be in the long run interest
of the corporation and thus would be considered as ethical.

Unfortunately most accounting thought implicitly applies Utilitarian reasoning.

Accounting students are taught to think that a good/successful business is one that
makes most profits.

Typically, they are also taught that they discharge their

accountability via the financial statements they provide to users. But these financial
reports do not show, for example, what environmental damage has been incurred by
the business or if the decisions of management were ethical.

Accountability and Stakeholders

If Accounting is part of the public information given by a firm to others to justify
its behaviour (Lehman, 1995), then it can be argued that a moral obligation exist to
provide additional environmental information in published accounting

reports.

Thus, accountants play an important part in making corporations more accountable,

because they can provide the relevant data so that society as a whole can evaluate
their environmental utilisation. To achieve this Grays concept of accountability
must be developed ie. the right to receive information and duty to supply it (Gray,
1990, p23). Providing environmental information is a step forward in establishing
an accountability relationship between corporations and others.

Gray (1990) argues that by providing this additional environmental data we can
firstly, keep organisational decision-makers informed about their use of economic
resources, and secondly inform the public about the way in which organisations are
using the resources. Accounting, by aiming to expose, enhance and develop social
relationships (Gray, 1992, p413) about the use of the environment by corporations,
can move beyond the 'decision-usefulness framework' to 'ethical frameworks' which
can work to constrain unjust practices at the community level (Lehman, 1995).

Critics of market capitalism assume that the particular motivations of liberal

societies, self interest and the desire for profit, must necessary lead to lack of
concern for the environment and the community at large. Gray (1992) supports this
by pointing out that the environment is in crisis and urgent solutions are needed. I
believe that if there are no strict controls on production in a liberal society such as
Australia, the natural resources will quickly be exhausted and the natural
environment will be polluted to harmless levels which can never be reversed.

A number of authors argue, however, that businesses should not run solely for the
interests of the stockholders. (Donaldson 1982, Miller and Ahren 1988). Rather,
businesses have a social responsibility that requires them to consider the interests of
all parties affected by the actions of the business. Management should not only
consider its stockholders (shareholders) in the decision making process but also
anyone who holds a stake in the outcome. Thus, another way to analyse the social
responsibilities of business is to consider those affected by the business decisions,
and referred to as stakeholders. Freeman (1984), defined the term stakeholders as
any group or individual who can affect or is affected by the achievement of the
organisations objectives(p46).
stockholders)

are

employees,

Examples of stakeholder groups (beyond

suppliers,

customers,

creditors,

competitors,

governments, and communities (Goodpaster 1991, p53).

Stockholders (owners) have a financial interest in the business and obviously expect
a financial return. The business affects their livelihood because they need money to
live and purchase material things.

Employees have their jobs and again their livelihood to consider. In return for their
skills and labour they provide to the business they expect a salary, benefits, security
(not to be made redundant), to be treated fairly and not to be exposed to a harmful
environment.

Suppliers are also considered as stakeholders because the business relies on them to
provide the necessary raw materials which will determine the final products quality
and price. The supplier needs to be treated with respect if they are to respond to the
needs of the business appropriately and accordingly.

Customers need also to be treated as a valued member of the stakeholder network

because without them the business would not exist. They provide the revenue that is
needed for the business to achieve its main goal to be profitable.

The community is another stakeholder because in theory the local community grants
the business the right to exist. They grant the business the right to build facilities to
operate, and they purchase the businesss products. For these and other reasons the
business should consider the community in their decision making process. They
should not pollute the environment because in effect they are exposing the
community to hazards (health hazards).

If stakeholder theory is to be used to analyse the social responsibility of

corporations, the questions that may be asked are: Is it so easy to consider all the
different stakeholders in the decision making process? And if so, is it really so
different from the Friedman philosophy of where a businesss social responsibility is
to make as much money as possible? Stakeholder theory does not give any primacy
to one stakeholder over another, so there will be times that when one group will

benefit at the expense of another. The problem that then arises is which group would
be given preferential treatment? Again a cost benefit analysis will have to take place
and one will have to calculate the utility of a proposed action for the stakeholders.
But taking into account of the different stakeholders would that make those
businesses more ethical? Kenneth Goodpaster (1991) made the important point that
merely identifying a group as stakeholders in some activity does not, by itself, point
towards a correct or appropriate ethical analysis of the activity. This theory is one
step forward from Liberalism (capitalism/free markets) to one of reform
liberalism.

Liberal accountability theorists believe that in providing more

information corporations are satisfying the needs of the different stakeholders.

However, if corporations are going to take the step to becoming more considerate of
all stakeholders and responsible for their actions, they must break away from the
liberal models (instrumental reasoning) which are in place and move towards a
practical way of reasoning. Lehman (1999) stated Practical reasoning is the type of
reasoning we use in our everyday deliberations to make moral and ethical
decisions.

Communitarianism
Corporations (businesses) must learn to treat their management, workers, suppliers
and customers, as well as their shareholders, as members of a shared community.
This task requires the embodiment of communitarian principles in the working of
every organisation in the economy, both in the private and public sector.

A communitarian wants society to bring up people with built-in moral principles

which restrain them from evildoing; the law is just a back up, to restrain anyone
whose upbringing fails to stick(Stretton, 1994, p267). So people will need plenty
of teaching - from family, employers and school or from their daily experiences of
life if they are to think more practically and with moral principles.
Communitarians believe that it takes a lot of history and collective action both to
develop the complex society that offers a great diversity of options, and to bring up
individuals with confident, skilful capacities to think and choose for themselves
(Stretton, 1994, p267). When these individuals learn or decide that some things are
good and some are bad, and thereafter sees them as bad or good, their disposition to
recognise things in that way will become the individuals character (Stretton 1994).

But by having a communitarian way of living would corporations still aim to

increase profits, or will they exist just to serve the community? What type of society
would accommodate the communitarian principles? Would communitarianism cause
the corporations to act in the public interest? As stated by Lehman (date unknown)
a broader communitarian framework seeks to bring about social change through
informed dialogue in a public sphere; in questioning the assumption of economic
growth it is suggested that procedural liberalism could be used as a corporate mask
to perpetuate unchecked economic development that is destructive in nature (p 12).
Communitarians worry about the tendency to reduce practical reasoning to
instrumental reasoning which is the type of reasoning used by economists to arrive

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at optimal solutions at minimal costs (Taylor, 1995), and is a central strand in

contemporary liberal and accountability models (Lehman, date unknown).

Conclusions
Corporations may have more than just the responsibility to increase profits, and must
consider the environment and community at large. This may require that we move
away from the greedy capitalist liberal society that we are living in, if we as a
community are to become more considerate of others. For the community at large
(including corporations) to be moral, they may require to be educated by institutions,
friends and family around them.

Corporations will need to think further or consider more than just the stockholders in
the decision making process. Stakeholder theory may be one step in the right
direction but communitarians would argue that this is just reform liberalism.
Communitarians critique of liberalism is that both the Friedman and stakeholder
theories are instrumental systems and therefore narrow our thinking and operate
through the notion of a corporation.

If we do head in this direction, traditional accounting may need to be reformed

through the technology of social and environmental accounting to make corporations
more accountable to the community. Environmental accounting may be essential if
corporations are to satisfy the accountability relationships with stakeholders
(corporations giving an account of its actions to stakeholders), and if it is to change

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the consciousness of corporations. Environmental accounting ultimately calls for

corporations to give and provide reasons for their use of the environment (Lehman,
date unknown, p396).

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