Profit Maximization Is the Only Realistic Criterion by Which Business Organizational Effectiveness Should Be Reasonably Judged
One side consists of purely economic view where management’s only social responsibility is to maximize profit while the other side is all about socio-economic position holding values and ethical rules that managers and non- managerial employees are expected to follow. General Overview Business ethics Definition: These are moral principles that guide the way a business runs / is conducted. Approaches to business ethics * Deriving Business Ethics from the Profit Motive * Deriving Business Ethics from General Moral Obligations * Business Ethics restricted to following the Law Corporate Social Responsibility (CSR)
Definition: Understanding your business’ impact on the wider world and considering how you can use this impact in a position way. Dimensions of CSR * Ethical dimension * Economic dimension * Philanthropic dimension * Legal Dimension * Civil law * Criminal law CSR Perspective * Efficiency perspective * Managers as Agents * Manager as Owners * Strategic Corporate Social Responsibility Perspective * Inside Out Approach * Outside In Approach * Outside Out Approach * Social Responsibility Perspective In depth Discussion Business Ethics When business ethics is spoken of it usually means one of three things, i. . i. Avoid breaking the criminal law in one’s work related activities. ii. Avoid actions that may result in civil law suits against the company and iii. Avoid actions that are bad for the company’s image. Behaving ethically means distinguishing between right and wrong and making the best logical decision. It is not hard to identify unethical business practices; examples of such practices include; * Use of child labor * Use of unlawfully copy righted materials * Engaging in bribery * Unfair treatment of the employees * Discrimination and violation of human rights. Approaches to business ethics Deriving Business Ethics from the profit motive There has been an argument that there is symbiotic relation between ethics and business in which ethics naturally emerges from a profit oriented business. This approach has two versions; the weak and strong version. Weak Version This version suggests “good ethics result in good business” meaning moral business practices equals profit. Example, it is profitable to make safe products which will result in low product liability lawsuits. F. Hartley’s book, “Business Ethics” argues that long term interests of a business are served best by seeking a trusting relation with the public. Hartley 1993) However this version has a number of problems. Criticism of the weak version * Moral business practices will have an economic benefit in a long run hence it provides less incentive for businesses designed to seek short term profits. * Some of these practices are not economically viable even in a long run. Example the act of keeping older workers who are no longer efficient as opposed to replacing them with younger more efficient workers * Importantly these moral business practices depend on what “at that time” will produce a profit.
The same practices might not be viable economically in a different market. Strong version It suggests the reverse strategy that in a competitive and free market profit motive will bring about proper moral environment. I. e. when customers demand safe products and workers demand privacy then they will work for and buy from those companies that meet these demands. In simpler terms “good business results in good ethics” Milton Friedman argues that this will only happen if at all the governments allows a truly free and competitive market. Criticism of the strong version
This approach assumes that consumers and workers will demand the morally proper thing. A consumer may opt for a lesser safe product if they know it will save money similar to workers, they might forego demands of privacy if compensated with higher wages. * Business ethics restricted to following the law Moral obligations in business are restricted to the law requirements. Moral principles beyond law requirement / supra-legal principles appear optional since there is a dispute of their validity from philosophers and a wavering society on their acceptance.
Without a widely recognized system of ethics outside the law it is unreasonable to demand business people to be obligated to principles that are optional. We live in a cultural pluralistic society where the business related moral obligations are those already contained in the law such as product safety, safe working conditions, fair hiring and firing practices, honest advertisement etc * Deriving business ethics from general moral obligations This approach suggests that morality must be introduced as a factor outside both the law and the profit motive.
Gene Lacznick, “Business Ethics: A Manager’s Primer” 1983 says “proper ethical behavior exists on a plane above the law. Law merely specifies the lowest common denominator of acceptable behavior. ” Philosophers offer five fairly general moral principles as suggestions Harm principle: there should be fairness in all of the business’ practices Human right principle: Human rights should be respected by all businesses Autonomy principle: Businesses cannot infringe on the rationally reflective choices of people Veracity principle: Deceptive practices should not exist.
Criticism * The principles are too general; they do not specify what counts as unfairness, human right violation or harm. * They are abstract in nature * They do not give clear guidance when dealing with complex situations * They are difficult to apply to concrete situations. CSR is a balance between law and ethics. It is a about taking a responsible attitude going beyond the minimum legal requirements and following straight forward principles that apply whatever the size of your business. Law Rules establishes by a government under which businesses operate.
Going against law leads to punishment, usually paying a fine or jailed or sometimes both at once. Ethics Branch of philosophy dealing with right and wrong, moral principles or values governing a particular culture, group or individual. Dimensions of CSR Social responsibility is the organizations obligation to maximize its positive impact on stake holders and reducing the negative impacts. It includes legal, economic, philanthropy and ethical dimensions. * Legal Dimension It concerns obeying the government’s laws and regulations. Civil law duties and rights of individuals and organization * Criminal law laws that prohibit certain actions and violation will result to being imprisoned or fined or both * Economic Dimension It is all about how resources for the production of goods and services are distributed within the social system. As the manager you need to ask yourself do consumer favor companies that are socially responsible or those that are only concerned with making profit. * Ethical Dimension This refers to the behaviors and activities that are expected or prohibited by the organizational members, society or community * Philanthropy Dimension
The organization’s contribution to the society CSR is mostly being linked to philanthropy, that is they mean the same thing and that it is just a corporate term used in today’s business world, but the two are very different, where one is just a selfless act as a human to give back to the community where no one is going to hold it against you if you do not do it and the other one is not because it is a direct connection to people and the environment. Difference between CSR and philanthropy. * CSR is behavior by business over and above legal requirements voluntary adopted. CSR is linked to the concept of sustainable development businesses need to integrate the economic, social and environmental impact in their operations * CSR is not an optional “add on” to business core activities but about the way in which business is managed. CSR cannot be related/ pinned to philanthropy. It’s a decision strategy aiming to ensure long term viability of the business by assuming an active role in the development of the community, economy and environment. CSR Perspective There are three Corporate Social Responsibility perspectives, namely 1. Efficiency Perspective
This is where the manager’s major focus is to maximize profit for the owners of the business; the needs of the other constituencies do not pose as important. Under this perspective two types of managers are looked at; a) Managers as Agents The managers have no obligation what so ever to act on behalf of the society especially if this act does not maximize profit for the share holders. The decision to serve society is made by the share holders. b) Manager as Owners He/she decides if acting on behalf of the society will achieve the self interests and interests of the whole company. . Social Responsibility Perspective Under this perspective the organization/ firms are required to fulfill certain obligations and responsibilities towards the society as a whole and not concentrate only on reaching the share holders demands. The firm is requires to find a balance so that they cab cater all their major stake holders’ needs. These major stake holders are: * Society * Employees * Financiers * Shareholders * Communities * Suppliers Advantages Undertaking this perspective will mean having good relationship with the stake holders.
For employees: giving them what they require like better pay, good working conditions, employee benefits etc will mean they are motivated and hence increase productivity and reduce employee turnover. For suppliers: paying them on time, loyalty and ordering for products without glitches and cancellations will mean they will supply good quality products, discounts and on time delivery. For community & Society: providing employment opportunities, encouraging education, being environmentally friendly, not going against culture will mean acceptance, good reputation and of course good attraction for future investors.
For financiers: like banks, government, donators etc if the firm has a good financial record and they are putting their funds into good use, the financiers will become long term supporters and this will also build trust between the two parties. For share holders: as long as supporting all the above stake holders does not interfere with getting a higher return at the end of the day, they should be happy and provide what is needed for the company’s general growth. Disadvantage
The biggest problem with this perspective is that as manager it is impossible to cater for all the stake holders’ needs and expectations being we are humans and we have different needs and ideas, so you cannot give in to one without interfering with other. 3. Strategic Corporate Social Responsibility Perspective The above perspectives have been combined to form this one and three criteria are introduced to guide managers to acting responsible; a) Outside out approach The manger takes the time to look at social issues that are posing a problem in general and find ways his/her firm can contribute to help solve those problems. ) Inside out approach Manager’s only take the time to look at the internal issues that are important to the firm. The problems that are happening outside the surrounding environment do not impact on their decisions nor do they concern them with solving them. c) Outside in approach The manager will look at the issues surrounding the company outside and pick out specific areas in which the company has an impact on or concern them in anyway. Corporate Social Responsibility works when…… There is trust and communication between the management and the employees * Owners look at and accept long term views * There is a holistically made decision from the management. Corporate Social Responsibility does not work when….. * Owners want to get rich quick. It is a process that shows benefits after long term implantation. * There is poor treatment of employees * Management works with the thought that resources are unlimited * CSR is viewed as corporate philanthropy * CSR is viewed as a public relation strategy Arguments for the assumption of social responsibilities * Long run profits:
Businesses that are SR tend to attain more and secure long run profits, as a result of better community relations and enhanced business image * Superiority of prevention over cure: To avoid incurring more costs to correct the social problems and loss of energy and concentration away from future accomplishment of its goals they should deal with them before they are too serious. * Possession of resources: Business will have the proper resources such as managerial talents, financial resources and technical experts to provide assistance to public and charitable projects that need support * Stockholder interest:
The stock market will award business which are SR with higher price earnings ratio because they are viewed as less risky and open to public attack and eventually improve the price of a business stock in a long run * Balance of responsibility and power: If power is greater than responsibility there is an imbalance which brings about irresponsible behaviors that is not good for the public. There should be an equal large amount of responsibility to balance out the large amount of power businesses have in the society * Public image:
The public considers social goals important, firms can build a favorable public image by pursuing those goals to gain access to better markets, employees, customers and other benefits. * Better environment Involvement of businesses lands a helping hand in solving difficulty social problems creating a better quality of life and desirable community to attract to hold skilled employees. * Discouragement of further government regulations: Becoming SR businesses are faced with less government regulations since they add costs and hinder flexible decision making of the management.
Arguments against the assumptions of social responsibilities * Too much power Enough power has already been given to business by the society; undertaking social responsibilities will mean giving it even more power as it already a powerful institution in the society * Lack of broad public support Since there is a divide public on the issue of being socially responsible there hasn’t been a mandate from the society for businesses to involved in social issues. * Lack of skills Business leaders’ skills and abilities are highly linked / associated with economics; they are under qualified to deal with social issues * Costs
Businesses end up absorbing costs or pass them over to the consumers at a higher price since many of these responsibilities don’t pay their own way * Violation of profit maximization In business social responsibility is measured when it strictly tends to its economic interests and leaves the rest to other institutions * Lack of accountability There is no direct accountability from business sectors to the public like with political representatives that pursue the social goals and are held accountable Conclusion and Recommendation
It is very clear that in one way or the other businesses today have to think of their external environment because it impacts their decision and it will help make more profit in a the long run. If a business will choose to ignore this and concentrate on making profits alone, they must be sure they are only going to be around for a short term, chances are they will not get the biggest return for their shareholders, simply because if the society, community, government as well as suppliers do not get any support from this company then it is not worth their support and eeing how these stakeholders are important, business should totally rethink their business strategy. There is more positive impact involved in judging business’ effectiveness through business ethics and CSR, since these are the most realistic options available other than profit maximization. With this I make a stand to say profit maximization is not the only realistic criteria in which business effectiveness can be judged. I would recommend business get training and development on how to operate more responsible and ethically and still make profits. Reference: * www. scribd. om/doc/3934672/impotance-of-CSR-to-business * www. businesslink. gov. uk * www. citeman. com * http://www. utm. edu/staff/jfieser/vita/research/Busbook. htm * Business Ethics and Values Colin Fisher & Adam Lovell, Prentice Hall, 3rd edition 2003 * www. malwarwick. com/assest/presenatation/the-five-dimension-of-csr-slide. pdf * G F Cavanaugh, D. J Moberg and M Velasquez, “The Ethics of Organizational politics” Academy of Management Journal (June 1981) pg 363-374. * Crane A (2010) Business Ethics 2nd Edition Chapter 2 pg 45-50. Oxford University, Press London.