‘The Corporate Social Responsibility of Business is to Maximise Shareholder Wealth’ Discuss.
To understand corporate social responsibility we must first understand what a corporation is. A corporation is “an ingenious device for obtaining individual profit without individual responsibility” according to Bierce in his Devil’s Dictionary. (cited in Vallely. B, Article) The European Commission defines corporate social responsibility as “a concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment.” (cited in Branco, M.C and Rodrigues, L.L, 2007), this suggests that a business should identify it’s stakeholders needs and values and use this within its strategic and operational decision-making process. Another way of defining corporate social responsibility according to Cannon (1992)(cited in Brealey, R.A, Myers, S.C and Allen. F, 2006) is that the ‘primary role of a business is to produce goods and services that a society wants and needs; however there is an interdependence between business and society in the need for a stable environment with an educated workforce’, he then goes on to quote Lord Sieff, the former chairman of Marks and Spencer plc: “Business only contributes fully to society if it is efficient, profitable and socially responsible.” (cited in Brealey, R.A, Myers, S.C and Allen. F, 2006)
The area defined by advocates of CSR increasingly covers a wide range of issues such as plant closures, employee relations, human rights, corporate ethics, community relations and the environment. CSR Europe, a membership organisation of large companies across Europe, in its reporting guidelines looks at the following areas: workplace (employees);
marketplace (customers, suppliers);
environment;
community;
ethics; and
human rights.
“Whether or not business should undertake CSR, and the forms that
responsibility should take, depends upon the economic perspective of the firm that is adopted.” (Moir. L, 2001).
These are all very good definitions of corporate social responsibility but: is there a Social Responsibility of Business?; Is this social responsibility of business to maximise shareholder wealth?; or is there more to the social responsibility of a business? These are questions commonly asked by a business and depending on the company some will be in favour of maximising shareholder wealth and some will argue against it.
Some companies engage in CSR purely for the public good and don’t expect a return on profits for example Ben &Jerry’s Ice Cream’s Social Assessment has said that it looks to “create a broader, bolder vision of how it can leverage its reputation and and its expertise to advance its Social Mission” (cited in Brealey, R.A, Myers, S.C, Allen. F, 2006) but then there is the enlightened self-interest model of CSR that states that incorporating CSR can lead to differentiation and competitive market advantage for the business. Companies that have implemented a strong CSR policy have also been successful in establishing a positive brand. Milton Friedman’s article in the New York Times (1970) is one of the first to argue for this profit-based social responsibility of business, he also does not ignore the ethical responsibility and explains his view that a corporate executive has a “responsibility to conduct business in accordance with (his or her employer’s) desires, which generally will be to make as much money as possible while conforming to the basic rule of society, both those embodied in law and those embodied in ethical custom”. (cited in Brealey, R.A, Myers, S.C, Allen. F, 2006). This view of corporate social responsibility is quite a common one. As the agents of the owners of business, managers have a primary responsibility to pursue maximum profits for shareholders. By pursuing these profits managers will be able to allocate resources to their most efficient resources. Consumers are the ones who most value these resources so in return, over time this profit will work toward the ultimate satisfaction of consumer demand, which according to utilitarianism is the optimal social good.
How can shareholders ensure that management don’t look after their own interests before that of the shareholder? Good systems of corporate governance can help shareholders ensure that the managers are looking after their best interests. Shareholders are the ones who elect the board of directors in a company and when a company starts to slide and managers do not offer a recovery plan the board does act but if they don’t and the shareholders believe this they can elect a new board of directors who will then appoint a new management team so it is in the best interests of a business to ensure they are doing everything they can to ensure there are profits and the shareholders wealth is being maximised. Another way shareholders can motivate the managers to ensure their profits are being maximised is by the threat of selling their shares as if enough shares are sold then this “damages top management’s reputation and compensation. Part of the top managers’ paychecks comes from bonuses tied to the company’s earnings (…), which pay off if the stock price rises but are worthless if the price falls below a stated threshold.” (Brealey, R.A, Myers, S.C, Allen. F, 2006).
Is it desirable for managers to act in the interests of their shareholders? Does a focus on enriching the shareholders mean that managers must act like greedy mercenaries? Profitable companies are the ones with satisfied customers and loyal employees, if it were the contrary the company would end up with declining profits and dissatisfied customers. Obviously, when we say that maximising shareholders wealth is important it does not mean that we can do anything to ensure this wealth. There are “unwritten, implicit rules of behaviour” (Brealey, R.A, Myers, S.C, Allen. F, 2006) which companies use to keep the trust. An example of distrust was that of The Market-Timing Scandal, 2003 which was basically when companies were checking on US stocks to see if there was a huge surge in stocks and if so buy and sell the next day when the Asian and European stocks were out giving them substantial profits and “when the scandal came to light these companies suffered huge withdrawals, which severely damaged prospects for future revenues and profits.” (cited in Brealey, R.A, Myers, S.C, Allen. F, 2006).
Should firms be managed for Shareholders or all Stakeholders? It has often
been suggested that companies should be managed on behalf of all stakeholders, not just the shareholders. Stakeholders include: employees
customers
suppliers
communities where the plants and firms are located
Depending on the country where the firm resides there are different view points as to what the corporations aims should be. In the United States, the United Kingdom, Republic of Ireland and other “Anglo-Saxon” economies, the idea of maximising shareholder wealth is the chief financial goal of the firm but in other countries such as in Germany, for example, the workers’ interests are put forward much more strongly and “they have the right to elect up to half the directors to the companies’ supervisory boards. As a result they have a significant role in the governance of the firm and less attention is paid to the shareholders” ( Brealey, R.A, Myers, S.C, Allen. F, 2006). Although in saying this, capital markets have now become more global so there is a greater pressure for companies’ to adopt the wealth maximisation for shareholders as its main goal. A number of German companies have adopted this and are listed on the New York Stock Exchange but for example “in Japan there has been far less movement in this direction, for example, the chairman of Toyota has suggested that it would be irresponsible to pursue shareholders’ interests” (Brealey, R.A, Myers, S.C, Allen. F, 2006).
The extent to which these organisations use the ideologies of CSR varies greatly both ideologically and in practice. “Recent research in Ireland has shown that 90% of companies believed that CSR should be part of a company’s DNA, yet only 30% thereof actually did anything about it.” (Vallely. B, Article).
Many organisations view CSR as a strategic investment and consider it necessary in order to achieve the reputation and that there is a need in gaining an importance in attracting and retaining key staff and to winning and retaining prestigious contracts and clients. Many of these companies
have decided to operate using CSR. This has been achieved in many ways including: • incorporating CSR in their mission statements
• appointing a ‘champion’ of CSR
• formally incorporating CSR objectives into its strategic planning process • dissemination of CSR targets and reporting of key performance indicators • retaining consultants to advise on existing performance and to recommend improvements
• appointment of committees to implement and reviews CSR related policies.
Some organisations see social responsibility as a passing trend and are “happy to get by with a bit of lip service and tokenism. Other organisations view CSR as the preserve of multinationals and government.” (Vallely. B, MBA).
Part of the challenge in pursuing CSR related objectives lies in the relative novelty of the concept. The critical debate is whether or not CSR detracts from the objective of maximising shareholder wealth. As with all debates there are opposing views including:
Arguments in favour of CSR include that it;
• creates positive Public Relations for the organisation, or, as a minimum avoids bad P.R. • helps attract new and repeat custom
• improves staff recruitment, motivation and retention
• helps keep your organisation within the law,
all of which may be considered to support the drive to maximise profits.
However, there are many writers on this topic who vigorously defend against the notion that private organisations should embrace social responsibility. The work of Friendman, Reidenbach & Carr sums up the main arguments against CSR;
• market capitalism is the most equitable form of society that has ever appeared • the ethics of doing business are not those of wider society •
governments are responsible for the well being of society • an organisation’s maximum requirement is to remain within the law, no more than this is required.
Ultimately, they argue that business organisations are created and run in order to maximise returns for their owners and that CSR detracts from the profit maximisation.
So far I have discussed whether the corporate social responsibility of business was to maximise shareholder wealth but “taken literally profit maximisation doesn’t make sense as a corporate objective and here are three reasons: 1. Shareholders might not want a manager to increase next year’s profits at the expense of profits in later years. 2. A company may be able to increase future profits by cutting its dividend and investing the cash. That is not in the shareholders’ interest if the company earns only a low return on investment. 3. Different accountants may calculate profit in different ways. So you may find that a decision that improves profits in one accountant’s eyes will reduce them in another’s.” (Brealey, R.A, Myers, S.C and Allen. F, 2006).
In conclusion, the debate as to whether ‘the corporate social responsibility of business is to maximise shareholder wealth’ is still a hot topic and the role of companies in society is still only a new idea and depending on your viewpoint CSR may be considered to support or detract from the objective of maximising shareholder wealth. Neither view point is definite.
As the public debate on CSR and the changing role of business in society intensifies, companies will need to determine their own view on CSR and adopt their own stance on the subject. Ultimately, they will have to make policy decisions that are in the best interests of the company and its owners, their shareholders. In my opinion, especially in Ireland and in the forthcoming future I think that companies will take the CSR into account as it in return from all what I have researched seems to help maximise shareholders wealth. Maximising shareholder wealth is of core concern to business and is in my opinion one of many corporate social responsibilities
a business should have.
References
1. Brealey, R.A, Myers, S.C and Allen. F (2006), Corporate Finance, 8th edition, McGraw-Hill/Irwin, New-York.
2. Hartman. P and Des Jardins. J (2008), Business Ethics: Decision-making for Personal Integrity and Social Responsibility, International Edition, McGraw-Hill/Irwin, New-York.
3. Vallely. B (no given year), Corporate Social Responsibility explained, and how it relates to the requirement to maximise shareholders’ wealth, Article, Cork Institute of Technology.
4. Lance Moir, (2001) What do we mean by corporate social responsibility?, Corporate Governance, Vol. 1 Iss: 2, pp.16 – 22. Full-Text (Online) Available: http://0-www.emeraldinsight.com.ditlib.dit.ie/journals.htm?issn=1472-0701&volume=1&issue=2&articleid=873127&show=html
5. Branco, C.B and Rodrigues, L.L, (2007) Positioning Stakeholder theory within the Debate on Corporate Social Responsibility, Electronic Journal of Business and Organisation Studies, Vol.12 No.1. Full-Text (Online) Available: http://ejbo.jyu.fi/pdf/ejbo_vol12_no1_pages_5-15.pdf
