The social responsibility of business implies the obligations of the management of a business enterprise to protect the interests of society.
According to the concept of social responsibility, the objective of managers for taking business decisions is not merely to maximize profits or shareholders' value but also to serve and protect the interests of other members of society such as workers, consumers and the community as a whole.
Thus, the Sachar Committee on Companies and MRTP Acts appointed by the Government of India states, “In the development of corporate ethics we have reached a stage where the question of social responsibility of business to the community can no longer be scoffed at or taken lightly. In the environment of modern corporate economic development, the corporate sector no longer functions in isolation. If the plea of the companies that they are performing a social purpose is to be accepted, it can only be judged by the test of social responsiveness shown to the needs of the society”.
It may be noted that some Indian sociologists and economists relate the idea of social responsibility of business to the Gandhian concept of trusteeship. According to Mahatma Gandhi, the capitalist class owns wealth or capital as trustees of the society. The resources and capital they use for the production of goods and services, according to him, should be used not to maximize profits for them but for the larger benefit of society.
However, in our view, it will be too idealistic to expect that business enterprises will be purely guided by the benefits they confer on society through their activities. The concept of social responsibility as used in management science is that businesses should maximize their profits subject to their working in a socially responsible manner to promote the interests of society.
Their business activities should not harm other groups such as consumers, workers, and the public at large. Mr N.R. Narayana, Chairman of Infosys makes the idea of social responsibility of business quite clear when in a conference on corporate social responsibility he said, “Corporate’s foremost social responsibility is to create maximum shareholders’ value working in a way which is fair to all its stakeholders — workers, consumers, the community, government and the environment He further points out.”
Working in harmony with the community and environment around us and not cheating our customers and workers we might not gain anything in the short run but in the long term it means greater profits and shareholders’ value’
Social Responsibility of Business and Social Contract:
It is evident from above, the social responsibility of business implies that a corporate enterprise has to serve interests other than that of common shareholders who, of course, expect that their rate of return, value or wealth should be maximized.
But in today’s world, the interest of other stakeholders, the community and the environment must be protected and promoted. Social responsibility of business enterprises to the various stakeholders and society, in general, is considered to be the result of a social Fig. 3.1. Responsibility of Business Enterprises towards Stakeholders and Society in General contract.
The social contract is a set of rules that defines the agreed interrelationship between various elements of society. The social contract often involves a quid pro quo (i.e. something given in exchange for another). In the social contract, one party to the contract gives something and expects a certain thing or behaviour pattern from the other.
In the present context, the social contract is concerned with the relationship of a business enterprise with various stakeholders such as shareholders, employees, consumers, government and society in general. Business enterprises happen to have resources because society consisting of various stakeholders has given them this right and therefore it expects them to use them to serve the interests of all of them.
Though all stakeholders including society in general are affected by the business activities of a corporate enterprise, managers may not acknowledge responsibility to them. Social responsibility of business implies that corporate managers must promote the interests of all stakeholders, not merely of shareholders who happen to be the so-called owners of the business enterprises.
Responsibility to Employees:
The success of a business enterprise depends to a large extent on the morale of its employees. Employees make valuable contributions to the activities of a business organization. The corporate enterprise should have good and fair employment practices and industrial relations to enhance its productivity. It must recognise the rights of workers or employees to freedom of association and free collective bargaining. Besides, it should not discriminate between various employees.
The most important responsibility of a corporate enterprise towards employees is the payment of fair wages to them and provide healthy and good working conditions. Business enterprises should recognise the need for providing essential labour welfare activities to their employees, especially because they should take care of women workers. Besides, the enterprises should make arrangements for proper training and education of the workers to enhance their skills.
However, it may be noted that very few companies in India follow many of the above good practices. While the captains of Indian industries generally complain about the low productivity of their employees, little has been done to address their problems. Ajith Nivard Cabraal rightly writes, “It should perhaps be realized that corporations can only be as effective and efficient as its employees and therefore steps should be taken to implement such reforms proactively, rather than merely attempting to comply with many labour laws that prevail in the country. This is probably one area where good governance practices could make a significant impact on the country’s business environment.”
Responsibility to Consumers:
Some economists think that the consumer is a king who directs the business enterprises to produce goods and services to satisfy his wants. However, in modern times, this may not be strictly true but companies must acknowledge their responsibilities to protect their interests in undertaking their productive activities.
Invoking the notion of the social contract, the management expert Peter Drucker observes, “The customer is the foundation of a business and keeps it in existence. He alone gives employment. To meet the wants and needs of a consumer, the society entrusts wealth-producing resources to the business enterprise”. Given the above, business enterprises should recognise the rights of consumers and understand their needs and wants and produce goods or services accordingly.
The following responsibilities of business enterprises to consumers are worth mentioning:
They should supply goods or services to consumers at reasonable prices and not try to exploit them by forming cartels. This is more relevant in the case of business enterprises producing essential goods such as life-saving drugs, and vegetable oil and essential services such as electricity supply and telephone services.
They should not supply the consumers with shoddy and unsafe products which may do harm to them.
They should provide the consumers with the required after-sales services.
They should not misinform consumers through inappropriate and misleading advertisements.
They should make arrangements for a proper distribution system of their products to ensure that black-marketing and profiteering by traders do not occur.
They should acknowledge the rights of consumers to be heard and take necessary measures to redress their genuine grievances.
Despite the above responsibilities which are generally regarded as good marketing practices by management experts the business enterprises in India generally do not pay heed to them and as a result consumers are dissatisfied or disappointed in a large number of cases. There has been a growing awareness of consumer rights.
The organized movement to protect consumer rights which is termed consumerism has been the result of the negligence of business enterprises in their responsibilities to consumers. Besides, due to the indifferent attitude of business enterprises towards consumer rights, the Government has been compelled to enact the Consumer Protection Act to protect consumers’ rights and to prevent their exploitation by businesses.
Responsibility to Community:
Business enterprises function by public consent with the basic objective of producing goods and services to meet the needs of society and provide employment to the people. The traditional view is that in performing this function businesses maximize profits or shareholders’ value and in doing so they do not behave in any socially irresponsible way.
According to Adam Smith whose, invisible hand theorem is often quoted that while maximizing their profits, businessmen are led by an invisible hand to promote the interests of society. To quote him, “An individual or business generally, indeed neither intends to promote the public interest nor knows how much he is promoting it…. He intends only his own gains, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention,…… By pursuing his own interest he frequently promotes that of the society more effectively than when he really intends to promote it”.
In the present world where there are monopolies, and oligopolies in product and factor markets and also there are externalities, especially detrimental externalities such as environmental pollution by the activities of business enterprises, maximization of private profits does not always lead to the maximization of social benefit.
In fact in such imperfect market conditions, consumers are exploited by raising prices much above the cost of production, and workers are exploited as they are not paid fair wages equal to the value of their marginal product. Besides, there are harmful external effects which are not given due consideration by private enterprises in making their business decisions. Therefore, there is an urgent need to make business enterprises behave in a socially responsible manner and to work for promoting social interests.
Given the above in the context of modern developments, it is hard to agree with Milton Friedman, a winner of the Nobel Prize in economics, who called the idea of corporate social responsibility a “fundamentally subversive doctrine”. Friedman writes, “There is one and only one social 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”.
However, few economists and rational thinkers will subscribe to Friedman’s views like that of Adam Smith. Thus, authors of a noted textbook on management write, “It is true that Friedman sets a rather high standard when he suggests that businesses should operate within the ‘rules of the game’, practising neither deception nor fraud. The rules of the game obviously include accepted ethical practices, in addition to international, national and other laws. How many corporations are willing to tell the absolute truth in their advertisements and to engage in open and fair competition avoiding collusion, price fixing and so forth. The fact is that few subscribe to Friedman's hard-line views today”.
Expressing the same sentiments, Dr Manmohan Singh, who has been instrumental in initiating economic reforms promoting liberalization and privatization, in his recent speech while inaugurating the campus of the Institute for Studies in Industrial Development on May 1, 2007,,, said, “I was struck by a comment in the media that most of the billionaires among India’s top business leaders operate in oligopolistic markets and in sectors where the government has conferred special privileges on a few. This sounds like crony capitalism……. Are we doing enough to protect consumers and small businesses from the consequences of modern capitalism in our country” Later, on May 24, 2007, while giving an inaugural address at the Annual Session of CII he urged the captains of Indian industry to break cartels and abstain from greed in their quest for profit maximization?
To quote him, “The operation of cartels by groups of companies to keep prices high must end. It is unacceptable to obstruct the forces of competition from having a free play. It is even more distressing in a country where the poor are severely affected by rising commodity prices. Cartels are a crime and go against the grain of an open economy”. More importantly, he further adds, “Maximisation of profits should be within the bounds of decency and greed”.
The above views of Dr Manmohan Singh show that corporate businesses in India do not show any sense of social responsibility and due to oligopolies, informal collusion and other malpractices fleece the customers by charging higher prices to maximize their profits. This is clearly a refutation of Friedman’s view that profit maximization always implies the social responsibility of business.
Business enterprises have a lot of responsibility to society at large.
We mention below some of them:
To take appropriate measures to reduce the level of pollution and adopt eco-friendly technologies.
To generate sufficient employment opportunities to make a good contribution to the reduction of poverty in the country.
Respect the rights of workers and other employees and take appropriate measures to ensure their safety and improve their working conditions.
To provide quality healthcare to their employees.
To invest adequately in research and development to make innovations to improve their productivity.
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