SOCIAL RESPONSIBILITY OF BUSINESS

DISCUSSION NOTES FOR MBA SEMINAR

SIMON FRASER UNIVERSITY. OCTOBER 21, 1982

This has always been thought of as being a ‘backwater’ topic, or at least it was until the 1960’s, then came the era of Ralph Nader, the Sierra Group, Nam, South African politics, etc.

From this period came a growing belief that corporations are ‘persons before the law’, capable of individual action that is more than the collective action of the shareholders, boards of directors or even the employees.

It was only in the mid-fifties that the New Jersey Supreme Court upheld the legality of a corporate contribution to a university in the landmark decision A.P. Smith Manufacturing Company vs. Barlow. This decision which was upheld by the Supreme Court of the United States noted that such a social action, “In the Court’s view of the case amounts to a solemn duty.”

However, that view of the role of the corporation assuming the same social responsibility of an individual is not a simple one to analyze.

It is a truism that a corporation can exist only to the extent that a community exists in which it can sell its products or services. Therefore, a corporation must exist within the social context of the community it serves. it can further be argued that it is in the corporation’s interest to promote the well-being of that community.

There is no doubt that the corporation does live in a fragile trust relationship with the community it serves. This trust can be easily mutilated by circumstances sometimes controllable and sometimes not.

For example, one could argue that the recent Tylenol incident was largely beyond the control of Johnson & Johnson although, in this case, precautions could have been taken to lessen the likelihood of such downstream intentional tampering with their product. On the other hand some years ago Stafford Foods was convicted of adding tiny wood chips to their strawberry jam to simulate seeds when in fact there was virtually no strawberry in the product. In this latter case fraud existed and there is little doubt where the responsibility for the broken trust lay.

But, assuming a corporation is trying to be socially responsible, how far can it or should it go?

At one end of the scale we find Milton Friedman who, in Capitalism and Freedom wrote, “Few trends could so thoroughly undermine the very foundation of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.”

Even Dr. Friedman would admit that corporations had the social responsibility to avoid fraud. He noted that certain “rules of the game” were necessary.

His argument is that only if corporations make a profit can they create jobs, bring products and services to market, ensure that taxes can be paid, (whether these are personal taxes through the employees or corporate taxes), etc.

A ‘do-gooder’ attitude only confuses the decision making and dilutes the chances of attaining this primary objective.

At the other end of the scale is the ‘Greenpeace’ approach perhaps best exemplified by J.K. Galbraith who noted that, “if the mature corporation is recognized to be part of the penumbra of the state it will be more strongly in the service of social goals”, (the new industrial state).

This Greenpeace approach concludes that social responsibility is all that really Matters. The assumption is that every product should be:

• Fail-safe, e.g. Capsule bottles should be sealed, car safety devices should be universal, airplane security is vital, drug testing should be carried out to an absolute certainty, (not on animals of course).

• Environmentally benign, e.g. The product or service should be biodegradable, use non-leaded gasoline, etc.

• Aesthetically pleasing, e.g. Electrical wiring should be placed underground, (this provides problems, of course, for those wanting to avoid pollution through the use of trolley buses, which in turn require overhead wires or the aversion to hydro dams which must be traded off against the fear of nuclear plants).

• Universally available at an affordable price, (except of course in those countries where there seems to be unacceptable social or political processes such as South Africa).

Of course, neither extreme is feasible. The former approach would cause the corporation to self-destruct through the des truction of its own environment, or through social revolution, or simply through lack of product or service acceptance.

The latter would see the corporation fearing to put any new product on the market when faced with the risk of class actions, the extreme example of this is the Manville Corporation. This company is a successful and financially sound organi zation that is voluntarily putting itself into receivership because the total of the class actions regarding its use of asbestos would bankrupt the organization.

This fail-safe approach if pushed to its extreme would cause people to needlessly suffer because new drugs would never be risked, the same approach would gradually cause the cost of all products to become prohibitive. Watch the price of Tylenol escalate because of the need for new bottle security, (if indeed the product survives).

REASONABLE RISK

Like most business decisions the criterion will be reasonable risk. This means a reasonable risk that the product will be safe, will be acceptable to the consumer and will return an acceptable profit to the investor.

It is not easy, however, to understand when the reasonable risks have been properly assessed, I can only suggest the rather simplistic approach of looking at each such decision from the perspective of many years in the future. If 25, 50 or even 200 years from now you would feel reasonably secure in looking back at the decision made that it had been made reasonably then, you are likely making the right decision, if you can honestly say that your company tried to assess the risks and was reasonable in so doing then you will have done all that the public should expect of you.

Obviously such risk assessment is no guarantee of success.

RIGHTS AND RESPONSIBILITIES

It appears that the public seems to expect the people to have unlimited rights, and corporations to have only responsibilities.

But corporations, like people, have both. In the corporation’s case there should be reasonable right to pro tection against the irresponsible attacks through the courts or through government action when a reasonable risk had been taken.

If this is not the approach then economic paralysis will result.

Individuals also have responsibilities, e.g. Not to expect the unreasonable.

The press has a major responsibility to be constructively but not continuously critical. The tendency of the media to tear apart without any attempt to re-build is a major factor in the loss of confidence in all our institutions. Worse than that, it is leading to a dearth of people willing to take on any public responsibility whether individually or corporately.

BEYOND REASONABLE RISK

The above discussion related primarily to corporate respon sibility as it applied to what a corporation produces and how it goes about producing that product from an environmental, safety or resource usage standpoint.

The corporation’s responsibility can also be seen in terms of its actions towards its:

• Investors

• Employees

• Clients

Obviously a positive approach is to try to ensure that all three groups are one and the same. This can be accomplished through broad public share ownership, profit sharing with employees or cooperative ventures.

Such an approach tends to integrate the interests of the groups involved and avoid the ‘we/they’ attitude toward responsibility.

All of these approaches help in what is sometimes called an enlightened self-interest relationship with the various publics served.

ENLIGHTENED SELF INTEREST

This is a form of rationalization by a corporation for what it does. For example, if the corporation provides good working environments, job safety programs, insurance to relieve anxiety of employees, etc. Then it in turn gets better productivity. There is certainly some indication that this does work. The recent decision by the employees of delta airlines to buy a 30 million dollar Boeing 767 for the airlines to thank the management for not laying them off during difficult economic times is an extreme example of how this enlightened self-interest does work. On the other hand, after a while, many of the benefits provided to employees become either taken for granted or built into union contracts in such a way that the cost/benefit relationships are very difficult to determine.

The same type of self-justification can be projected into socially responsible assistance by corporations for a variety of community activities. This is the ‘buy-a-ballet’ or ‘support-a-squid at the aquarium’ concept. The general argument here is that by improving the liveability of the community it is easier to attract good management to the area.

A further extension of this is the support of united way where the rationale may be that by having a healthier, less crime ridden, better socially adjusted community, ultimately there will be more consumers and better sales.

But enlightened self-interest can be a fuzzy notion. There appears to be a trend away from the noblesse oblige approach. Corporate philanthropy as a percentage of net income before taxes has shown no very clear trend from 1936 through 1972. In terms of constant dollars the trend is likely down.

The main reason is likely that the corporation gets no thanks for such ‘soft social responsibility’. Sometimes it is even criticized for giving money away while at the same time con straining more direct job creating programs. This has been the case during the recent economic downturn.

It may frankly be better if there is some re-evaluation of the basis on which such social responsibilities are undertaken, i.e. If it is better thought through. The results for the organizations receiving the assistance will be more consistent, and the whole process better understood by the public at large.

It used to be argued that corporate philanthropy was really like a double gift, i.e. It is something that leads to a re duction in profits or distribution to the shareholder who may themselves be giving as individuals. In fact, this is an argument that should be looked at very carefully because approximately 90% of all Canadians take the automatic $100.00 charitable donation deduction indicating that they are giving less than $100.00 each, i.e. the impact of this ‘double jeopardy’ is not really very high.

SUMMARY

It would seem, therefore, that the best basis for social respon sibility in business is to do whatever best helps the corporation in the broadest sense to fulfill its primary task of providing goods and services. To this extent Milton Friedman was likely on the right course but his definition of what helps the corporation in this role was far too limited.

The wisdom of his approach is that, under a capitalist system, if the corporate community fails in its primary role there will be no jobs and, as there would be no taxes, there would be no government. The non-capitalist systems appear to offer a neater approach to social responsibility but carry a price that is felt by many to be too high to pay.

We are stuck, therefore, with a compromise situation which we must make as pragmatic as possible.