2.5 Theories of the Modern Corporation
2.5.1 Corporate social responsibility
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Prasad and Agarwal (2015), in their article aptly entitled “The Oxymoron that is
‘Business Ethics’”, present the view that business ethics can be thought of as an oxymoron in that an entrepreneur can either do business or can be ethical; he cannot be both, at least successfully. Vieta (cited in Prasad & Agarwal, 2015:13) is of the opinion that “the fundamental problem with traditional capitalism is that the creators of value are different from the appropriators of value; and it is this difference between the two that has grown over a period of time that is causing the problem. Apart from questions of the morality of the entrepreneurial rent seeking behaviour, the current model of capitalism is flawed in the sense it does not address the problem of income inequality and distribution either inter-temporally or inter-spatially.” Dobb (cited in Prasad and Agarwal, 2015) suggests: “In a partial attempt to obviate the problem, ethical codes of conduct have been established so as to have a partial convergence between the Kantian dilemma about moral and pragmatic imperatives.”
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2.5.1.2 Critique of Milton Friedman’s social corporate responsibility theory What Milton Friedman overlooked is that corporate citizenship is of paramount importance. Businesses operate within society, their workers are drawn from society and therefore it is unwise for companies not to plough back their profits into the society that supports them by buying goods and services.
Friedman was of the view that market forces were sufficient to ensure responsible behaviour by corporations and that the law was adequate for guaranteeing that corporations do not harm society.
Friedman’s theory of corporate social responsibility has elicited much criticism from Christopher Stone. Stone (cited in Rossouw & van Vuuren, 2013:88), in his 1975 book entitled The Social Control of Corporate Behaviour, strongly argues against Friedman’s assertions. His arguments are summarised below.
(a) Managers do not have an obligation towards shareholders only
Stone does not agree with Friedman’s assertion that managers only have an obligation to maximise profit for shareholders. He also disagrees with Friedman’s notion that management has made an implicit promise to shareholders to maximise profit. He correctly argues that in most cases shareholders have not met with management and that such a promise, which he refers to as a “Promissory Argument”, may possibly not exist.
Another version of the argument that Stone disputes is called “Agency Argument”.
Friedman’s view was that management as agents of shareholders had an obligation to look after the interests of their principals, or shareholders in this case. Stone correctly states that, contrary to Friedman’s assertion, management is responsible not only to shareholders but to all stakeholders of the corporation. This idea is very important as it forms the basis of this research and will be explored further in chapter 4.
Sirmon et al. (cited in Kleinau et al., 2016:71) write that the purpose of business is defined in its corporate mission statement, which summarises how the corporation
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aims to create value for society and concomitantly generate profits for its owners. They argue that these two goals are inextricably linked because, in order to generate profits, a company needs to deliver goods and services for the market. The consumers’
willingness to pay for these goods and services exceeds the firm’s costs of production.
Most importantly, they state that corporate profits do not simply represent the monetary gain that a corporate receives. They correctly argue that: “Corporate profits also reflect the net value for society which a corporation has produced when the cost of inputs are subtracted from the value of output.”
Kleinau et al., (2016) article entitled “Minimizing Corporate Social Irresponsibility to Maximize Social Welfare” turns traditional ideas about the social responsibility of corporations upside down by arguing that it “is not conducive to aim, to maximize corporate social responsibility (CSR). Instead, corporations should embrace their social responsibility by working to minimize corporate social irresponsibility (CSI)”
(Kleinau et al., 2016:71). They argue that it is more straightforward to minimize tangible sources of business and/or reputational risk such as environmental damage or child labour in the supply chain, than to maximise a construct for which a generally accepted definition is still pending.
They conclude by stating that following the line of their argument above will enable corporations to use their core business competencies and expertise to maximise social welfare by protecting those societal resources that are relevant to their own value- creation process (discussed further in Chapter 3).
(b) Market forces are not sufficient
It is important to state that Stone does not disagree with Friedman’s notion that market forces are efficient in allocating resources, as propagated by Adam Smith in his theory of “Invisible Hand”. However, he does disagree with the notion that markets are efficient in ensuring that the activities of the corporation service the social needs of the community efficiently. In most countries, including South Africa, companies are obliged to establish a Social and Ethics Committee (SEC) as provided by South African Companies Act.
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Stone also refutes the assertion by Friedman that adherence to the laws of the country in which a corporation operates will ensure socially responsible behaviour on the part of the corporation. He contends that there are time limitation problems, especially that laws are made in response to particular problems. Problems first occur and only then are laws formulated to deal with them. This creates the timing difference that Stone alludes to.