Who benefits?

Businesses are created in order to produce wealth, and they do this by producing value for others. They sell products that customers want, for a profit. Sometimes, these products or services are revolutionary, and have enormous impact on society. Multi-national corporations (MNC's), who operate world-wide and across many market segments, impact many people's lives. The largest company in the world, Walmart,  is a good example: At the end of 2013, Walmart has more than 11,000 retail units, under 69 different names, in 27 countries. It employs 2.2 million associates around the world, and 1.3 million of them are in the U.S.  It produced a total revenue of 469 billion dollars in 2013, with a net income of 17 billion dollars. The company transforms local economies wherever it opens a new store. It also revolutionized supply-chain management. 

Who is impacted, and who benefits from such a corporate juggernaut?  There are three main approaches to the question of who should benefit from the operation of a business: stockholder theory, stakeholder theory,  and the corporate social responsibility (CSR) approach. 

Stockholder Theory 

The stockholder theory is based on an idea proposed by the economist Milton Friedman.  He suggests that a company is an enterprise formed to make money, therefore its only responsibility is to increase profits and it has to be accountable only to the owners or stockholders. In the book Capitalism and Freedom, 1962, he writes: "There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

Friedman argues that a company should have no additional social responsibility to the public or society, because this dilutes the clarity of purpose, and distorts the functioning of free markets.  A company should be allowed to remain focused on its main goal, which is to increase profits for itself and for its shareholders. This is a question of freedom; and if it has to concern itself with the community rather than focusing on profits, it gets pulled into politics, image protection, and so on.

Critics claim that Friedman's stockholder theory is incompatible with the idea of corporate social responsibility, at the cost of the stakeholders. If a company donates services or goods to help people in a natural disaster, one could say that it is not acting in the best interest of the shareholders. However, one can also argue that donations to good causes strengthens the public image of a corporation, which can be good for business in the long run.

Friedman wrote his book in the 1960s. Today, we face a situation where corporate profits are rising, while household incomes stagnate or fall. The theory seems to be outdated. A vocal critic of Friedman is Naomi Klein with her book "The Shock Doctrine"  (2007),  where she says that business elites are winning -  most people become relatively poorer, while the owners and top managers gain enormous wealth.

Stakeholder Theory 

An alternative model was suggested in 1984 by Edward Freeman  ("Strategic Management: A stakeholder approach.") This model calls for more stakeholder inclusion in corporate decision making. Stakeholder theory is a theory of organizational management and business ethics that addresses morals and values in managing an organization. It identifies the groups which are stakeholders of a corporation, and describes methods by which management can respect and include the interests of those groups.  The basic principle here is that high ethical standards and inclusiveness will also be good business. 

A stakeholder is everyone who has a material interest in the company, or who is affected by its actions. Stakeholder theory argues that businesses owe their existence to a greater community. Therefore the business has a duty not just to generate wealth for itself, but also to enrich and improve the well being of the larger community. Management that balances all stakeholder interests in its decision-making, will act in the best long-term interest of the company.  

The main stakeholder groups: 

• Stockholders: Management has a duty to protect the interests of owners. This is a fiduciary duty, a legal mandate that requires people in positions of trust to act in the best interests of their beneficiaries. The executive team and the board of directors are the trustees for the stockholders, and the stockholders are the beneficiaries. 

• Employees: Companies have an obligation to treat workers fairly. Workers should be paid adequately, they should have a safe work environment, and other laws and regulations for worker safety and well-being should be followed (over-time rules, vacation, breaks, etc.) 

• Lenders: Companies have to be honest in their financial statements and forecasts when they look for loans, and they should live up to the agreed conditions. 

• Customers: The social contract between companies and their customers makes companies responsible for ensuring that they deliver the product or service their customers have paid for in a timely fashion, and that the product or service meets or exceeds the specifications expected by the customer. With the rise of social media and online rating systems, customers gain a lot more influence over the  behavior and products of businesses.

• Suppliers: Companies should negotiate fair contracts with suppliers and live up to the terms of those contracts in a timely fashion. Withholding payments, sharing suppliers' confidential information with competitors (such as using one supplier's bid to solicit lower bids from other suppliers), and using other questionable tactics violate the company's responsibility to treat suppliers as business partners.

• Government regulators: Companies have a duty to cooperate with government regulators and comply with rules and procedures designed to protect consumers and other groups. Questionable areas in this regard is the lobbying of large businesses and trade groups, with the intent to change laws and regulations in their favor. 

• Nongovernmental organizations (NGOs): NGOs often represent constituents that are only indirectly affected by a company’s activities; however, those constituents can conceivably suffer great and long-lasting harm if their interests are ignored. Ethical companies have an obligation to consider the viewpoints of NGOs — such as environmental groups and human rights and worker’s rights organizations. These groups can mobilize public opinion if a business ignores their calls. 

Corporate Social Responsibility

The term "Corporate Social Responsibility", or CSR, refers to a moral duty of every corporation to protect the interest of society at large. Even though the main motive of business is to earn profit, corporations should also act to increase the welfare of society, and should actively strive to operate within the framework of environmental norms. To this extent, many large corporations have begun to issue CSR reports that detail their socially beneficial actions.  The concept of CSR goes further than the stakeholder theory, because it now includes society at large. 

The idea behind CSR is to integrate a form of corporate self-regulation into the business model. CSR policies are supposed to function like a built-in mechanism through which a business monitors its compliance with laws, ethical and environmental standards, as well as international norms. Basically, companies actively strive to be good citizens. Sometimes they go even further and actively support a social good which lies beyond the interests of the company or what is required by law. Besides being profitable, companies also want to have a positive social impact on society, and thus increase public respect for themselves.  

CSR can be implemented or demonstrated in a variety of ways. 

• Environmental Sustainability, which includes recycling, waste management, water management, using renewable energy sources, utilizing reusable resources, creating 'greener' supply chains, etc. 

• Community Involvement, which can include donating money to charities, supporting community activities, sponsoring local events, engaging in fair trade practices, etc. Starbucks is an example for this. 

• Ethical Marketing Practices. Companies agree not to manipulate customers, or falsely advertise to potential consumers. Also, it means not to market to vulnerable populations, like children. 

Further Readings

1. Article by Friedman where he explains his view: The Social Responsibility of Business is to Increase its Profits. Quoted from: The New York Times Magazine, September 13, 1970.

2. The Wall Street Journal - Jun 2012: The Case Against Corporate Social Responsibility. By Aneel Karnani. The article argues that companies don't have a duty to address social ills, and to expect this means that companies are unduly burdened.  It also makes it more likely that the real solutions to these problems get ignored.

3. Robert Phillips. "Stakeholder Theory and A Principle of Fairness" Business Ethics Quarterly 7.1 (1997): 51-66.  Available at: http://works.bepress.com/robert_phillips/5. See the pdf below.