The social responsibility of a business is to increase its profits?

Dr B K Mukhopadhyay

(The author is a Professor of Management and Economics, formerly at IIBM (RBI) Guwahati. He can be contacted at m.bibhas@gmail.com)

Dr. Boidurjo Rick Mukhopadhyay

(The author, international award-winning development and management economist, formerly a Gold Medalist in Economics at Gauhati University)

In last weeks' column, we reviewed how corporate social responsibility (CSR, hereafter) is defined and perceived by different stakeholders of business organizations and wider society. In addition, several 'good' CSR examples were cited illustrating how businesses have managed to create 'social good' out of actions that were either due to inherently altruistic purposes or simply to improve their marketing image. Over the years, however, there has been a lot of scandals that several business organizations had to undergo which directly affected their intangible asset – 'brand image'. It is, therefore, once again, about how CSR could be a way in which business interacts with society. The questions we should be asking would be – what does a good corporate citizen mean? Is 'profit' a dirty word? How much should society pick up the 'external' business costs such as pollution? Does society care about 'fair trade' or getting a good value in price and quality suffice? How are ethical decisions made by businesses? More importantly, how do we screen all the questions above before running with assumptions or a quick yes/ no based on subjective judgment and at times, situational ethics.

Cases of workers exploitation, harsh working conditions, paying a wage that is lower than the statutory minimum wage are plenty. From the customers' perspective, organisations are not always transparent and honest. A plethora of false labelling, misleading pricing, quality differentiation, misleading information on packaging and advertising, and in worst cases, dumping products do take place. Then the question becomes whether companies 'should' tell customers everything. Corporate Governance plays a huge role in determining and ensuring that. The school of thought that dismisses CSR altogether assuming that businesses cannot be trusted and that terms such as 'sustainability or 'community development' are meaningless concepts for multinationals. Interestingly, the two key contrasting views that we come up with when reviewing CSR come from two individuals - Milton Friedman and Edward Freeman.

A. STAKEHOLDERS VS SHAREHOLDERS: While Friedman believed that businesses need to simply keep their shareholders and business owners satisfied, Freeman believed that businesses should be run for the benefit of all their stakeholders (employees, customers, suppliers, civil society, government amongst many others).

Milton Friedman's classic work "the social responsibility of business is to increase its profits" gained much traction throughout the 70s and 80s. However, the ideal situation is where a business is both profitable AND also meets the needs of other stakeholders which would create a 'win-win' situation in addition to ensuring business sustainability in the long run.

"That action is best that produces the greatest good for the greatest number" – Jeremy Bentham once opined. In the context of CSR, it is also a matter of fact that satisfying different stakeholders while sustaining profit isn't everything, the idea of 'contractarianism' is equally relevant which is when no action by a business should cause uncompensated harm to 'anyone' else. So, it is also about the rights and responsibilities of a business. It is somewhat tricky and not black and white as much as dismissing CSR seems easy. For example, every stakeholder wants a 'good deal' for themselves. Employees want good pay, customers want value for money, suppliers expect a decent contract and fair prices. But is it easy to please all the stakeholders at the same time? While customers want low prices, employees expect good wages.

However, good wages lead to higher costs consequently increasing the price of the products which ultimately makes a customer unhappy. Similarly, suppliers want a good price for their supplies which again could lead to higher costs (e.g., Starbucks works with the Fair-Trade Foundation) and a high price which subsequently could leave a customer unhappy. Whether we take the example of a multinational or an SME, these challenges are common and unavoidable while also illustrating that a business cannot possibly satisfy all stakeholders. Shareholders, after all, expects profit and so there is always a trade-off between stakeholders. Therefore, the question becomes what CAN a business do?

Three options, thereof – (i) Deliberately ignore all stakeholders, except shareholders, and go 'flat-out' for profit.

(ii) Pretend to take account of stakeholders and still go all out for maximum profit (e.g., 'green washing').

(iii) Try engaging with stakeholders and balance their 'aspirations' while not losing sight of profit.

B. EXAMPLES OF 'BAD ACTIONS: Foxconn has been in the news for CSR scandals for over two decades now, particularly for violating employment laws. Foxconn used to make Apple products in China and more recently made Amazon's Echo Smart Speakers and Kindle Devices. And a report illustrated that the workers in the hazardous factories run by Foxconn where these popular techs are made do not get sick or holiday pay. They can also be fired without notice during lulls in production. 40% of the staff that Foxconn used in their factories are 'agency staff' or 'dispatch workers' who fall in the above category. Those who worked overtime were paid at the normal hourly rate which is illegal since both Chinese law and Amazon's supplier code of conduct shows that workers should receive a rate that is time-and-a-half instead. Foxconn has a history of worker exploitation; they had a wave of workers committing suicide back in 2010 when Apple used to heavily outsource their manufacturing of iPhone and iPad to Foxconn. Besides, wage and worker exploitation, Foxconn also had serious factory accidents where workers died of electric shock in 2011 and also a factory explosion that killed four people and injured 18 others in the same year.

On top of that, frequent employee riots, using underage (starting from age 8) and illegal workers, and violating local laws are on their list. All these are to reduce costs. Very recently, the company had invested in robotic technology to replace workers in manufacturing and to tackle the diminishing trust in the company name. At some level we (as customers) should also wonder, how much and how badly do we have to use the products of these giant companies such as Amazon and Apple?

Similarly for Nike, 593,468 hours of overtime work went unpaid between 2010 and 2012 in Indonesia which sent shockwaves through the Indonesian labour movement. Eventually thanks to labour union strikes and negotiations, Nike decided to pay off $1 m to about 4,500 workers at a Nike plant in Serang, Banten in Indonesia. But again, Nike is not a new name when it comes to reports of labour exploitation and maintaining sweatshops since the 1970s. In the early 90s, a report published a detailed account of poor wages, child labour, and harsh working conditions of labour in Nike's outsourced factories (called 'sweatshops'). While initially, Nike shrugged shoulders on these cases saying it was up to the outsourced parties and who they treated their 'dispatch workers' in developing countries. But subsequently, as the brand suffered a serious 'bad reputation', the company started auditing their factories for occupational health and safety. The 'bad reputation' as an employer went to bigger lengths especially when competitors of Nike also followed similar practices and thus a higher-level action was required to tackle the unethical code of practice at the workplace.

In the mid-2000s, several 'anti-sweatshop groups were established, and at Brown University, Nike had to pull out from a contract with the Women's ice hockey team because a student activist group wanted Nike to put a company's code of conduct put in place first. Several similar cases were noted between 2010-2016 largely in Vietnam, Taiwan, Indonesia, China while at the same time the community activities on these matters became stronger, e.g., 'fair labour association' and 'workers right consortium' was addressing how child labour practices who were in their early teens, and women who represented 70-80% of the workforce.

Again, similar examples could be drawn from fast fashion companies like Zara, H&M, Gap, Primark who had their share of the above and took actions to change the way they run things and who they partner with, all to A) Reduce cost, B) Deliver value in terms of price and quality, and C) demonstrate a competitive advantage over direct competitors, D) Attempting to keep all stakeholders happy.

These companies have a very high impact on society, whether it's Nike or Amazon or Foxconn or any of the big names in the fast fashion industry amongst many other names from other industries. Some cases illustrate how poorly they treat workers, others have cases with suppliers or violating local laws, or companies like Google, Coca Cola, and Starbucks who have systematically exploited tax loopholes across countries over the years.

These companies have also done some 'social good' with their CSR or 'responsible image' campaigns. These make our judgement on CSR and why businesses do it rather difficult and certainly goes beyond definitive answers such as multinationals are inherently bad or do a social good that may be a part of the company's culture as illustrated in our previous week's column.