Stakeholders and Corporate Social Responsibility

Let’s begin this topic with quotation of Robert W. Lane, the Chairman and CEO of Deere & Company, “If you don’t have honesty and integrity, you won’t be able to develop effective relationships with any of your stakeholders.”

These stakeholder groups form the basis of success and failure of the business. Stakeholders are individuals or groups that have interests, rights, or ownership in an organization and its activities. Customers, suppliers, employees, and shareholders are example of primary stakeholder groups. Each has interest in how an organization performs or interacts with them. These stakeholder groups can benefit from a company’s success and can be harmed by its mistakes.

Secondary stakeholders are also important because they can take action that can damage or assist the organization. Secondary stakeholders include governments (especially through regulatory agencies), unions, nongovernmental organizations (NGOs), activities, political action groups, and the media.

In orders to serve their stakeholders in an ethical and social manner, more and more organizations are adapting the model of corporate social responsibility. The term Corporate Social Responsibility goes by many other terms such as corporate citizenship, responsible business or simply corporate responsibility.

When an organization builds ethical and social elements in its operating philosophy and integrate them in its business model, it is said to have possessed a self-regulating mechanism that guides, monitor and ensure its adherence to law, ethics, and norms in carrying out business activities that ensures the serving the interest of all external and internal stakeholders. In other words, the objective of being socially responsible business is achieved when its activities meet or exceed the expectations of all its stakeholders.

Here is a model for evaluating an organization’s social performance. The model indicates that total corporate social responsibility can be subdivided into four criteria-economic, legal, ethical and discretionary responsibilities.

These responsibilities are ordered from bottom to top in the following illustration. Let’s discuss each one  them briefly.

 

Economic responsibilities:

The first criterion of social responsibility is economic responsibility. The business institution is, above all, the basic economic unit of society. Its responsibility is to produce goods and services that a society wants and to maximise profit for its owners and shareholders. Economic responsibilities, carried to the extreme, is called profit-maximizing view; it was advocated by Nobel economist Milton Friedman. This view argued that a company should be operated on a profit-oriented basis, with its sole mission to increase its profits so long as is stays withing the rule of the game.

The purely profit-maximizing view is no longer considered an adequate criterion of performance in the world in general. Treating economic gain in the social as the only social responsibility can lead companies into trouble.

Legal responsibilities

All modern societies lay down ground rules, laws and regulations that businesses are expected to follow. Legal responsibility defines what society deems as important with respect to appropriate corporate behavior. Businesses are expected to fulfil their economic goals within the legal framework. Legal requirements are imposed by local councils, state and federal governments and their regulating agencies. Organizations that knowingly break the law are poor performers in this category. Intentionally manufacturing defective goods or billing a client for work not done is illegal. Legal sanctions may include embarrassing public apologies or corporate ‘confessions’.

Ethical responsibilities

Ethical responsibility include behavior that is not necessarily codified into law and may not serve the organization’s direct economic interests. To be ethical, organization’s decision makers should act with equity, fairness and impartiality, respect the rights of individuals, and provide different treatments of individual only when differences between them are relevant to the organization’s goals and tasks. Unethical behavior occurs when decisions enable an individual or organization to gain expense of society.

Discretionary responsibilities

Discretionary responsibility is purely voluntary and guided by an organization’s desire to make social contributions not mandated by economics, laws or ethics. Discretionary activities include generous philanthropic contributions that offer no payback to the organization and are not expected. Discretionary responsibility is the highest criterion of social responsibility, because it goes beyond societal expectations to contribute to the community’s welfare.