UNIT 1

Business Ethics and

Social Responsibility
Business Ethics and
Social Responsibility
BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

Any organization, including

nonprofits, has to manage the ethical
behavior of employees
an participants in the overall
operations of the organization. The
ethical conduct of
employees creates a culture of trust
and respect that makes a business
productive.
Any organization, including
nonprofits, has to manage the ethical
behavior of employees
an participants in the overall
operations of the organization. The
ethical conduct of
employees creates a culture of trust
and respect that makes a business
productive.
Any organization, including non-profits, has to manage the ethical behavior of employees an participants in the
overall operations of the organization. The ethical conduct of employees creates a culture of trust and respect that
makes a business productive.
Ethics comes from the Greek word, ethos, which means moral character. Simply put, ethics means knowing the
difference between right and wrong and continuing to do the right thing. -- but "the right thing" is not nearly as
straight forward as conveyed in a great deal of business ethics literature. Most ethical dilemmas in the workplace
are not simply a matter of "Should Bob steal from Jack?" or "Should Jack lie to his boss?"
The meaning being ‘ethical’ is to know right from wrong and to know when you are practicing one instead of the
other. (Many ethicists assert there's always a right thing to do based on moral principle, and others believe the
right thing to do depends on the situation -- ultimately it's up to the individual). Many philosophers consider ethics
to be the "science of conduct.

What is Business Ethics?

Business ethics is the application of ethical behavior in a business context. The concept has come to mean various
things to various people, but generally it's coming to know what it right or wrong in the workplace and doing
what's right -- this is in regard to effects of products/services and in relationships with stakeholders. We also
define business ethics as the principles and standards that determine acceptable conduct in business
organizations. Acting ethically in business also means being honest, doing no harm to others, competing fairly, and
declining to put your own interests above those of your company, its owners and its workers.
Personal ethics, on the other hand, relates to an individual’s values, principles, and standards of conduct. The
acceptability of behavior in business is determined by not only the organization but also stakeholders such as
customers, competitors, government regulators, interest groups, and the public as well as each individual’s
personal principles and values.
Recognizing Ethical Issues in Business
An ethical issue is an identifiable problem, situation, or opportunity that requires a person to choose from among
several actions that may be evaluated as right or wrong, ethical or unethical. In business, such a choice often
involves weighing monetary profit against what a person considers appropriate conduct.

Many business issues seem

straightforward and easy to resolve on
the surface but are
in reality very complex. A person
often needs several years of
experience in business to
understand what is acceptable or
ethical. For example, it is considered
improper to give
or accept bribes, which are payments,
gifts, or special favors intended to
influence the
outcome of a decision.
One of the principal causes of
unethical behavior in organizations is
overly aggressive
financial or business objectives. Many
of these issues relate to decisions and
concerns
that managers have to deal with daily.
Many ethical issues in business can be
categorized by the context of their
relation with
abusive and intimidating behavior,
conflicts of interest, fairness and
honesty ,
communications, misuse of company
resources, and business associations.
Many business issues seem straightforward and easy to resolve on the surface but are in reality very complex. A
person often needs several years of experience in business to understand what is acceptable or ethical. For
example, it is considered improper to give or accept bribes, which are payments, gifts, or special favors intended
to influence the outcome of a decision. One of the principal causes of unethical behavior in organizations is overly
aggressive financial or business objectives. Many of these issues relate to decisions and concerns that managers
have to deal with daily. Many ethical issues in business can be categorized by the context of their relation with
abusive and intimidating behavior, conflicts of interest, fairness and honesty, communications, misuse of company
resources, and business associations.

Misuse of Company Time

Theft of time is the number one area
of misconduct observed in the
workplace. One
example of misusing time in the
workplace is by engaging in activities
that are not
necessary for the job. It is believed
that the average employee steals 4.5
hours a week
with late arrivals, leaving early, long
lunch breaks, inappropriate sick days.
All of these
activities add up to lost productivity
and profits for the employers and
relate to ethical
issues in the area of time theft.
Abusive and Intimidating Behavior
Abusive and intimidating behavior is
the second most common ethical
problem for
employees. These concepts can mean
anything from physical threats, false
accusations, profanity, insults, yelling.
Abusive behavior can be placed on a
continuum
from a minor distraction to a
disruption of the workplace.
Misuse of Company Resources
Misuse of company resources has
been identified as a leading issue in
observed
misconduct in organizations. Issues
might include spending an excessive
amount of
time on personal e-mails, submitting
personal expenses on company
expenses reports,
or using the company copier for
personal use.
Conflict of Interest
A conflict of interest, on of the most
common ethical issues identified by
employees,
exists when a person must choose
whether to advance his or her own
personal
interests or those of others. To avoid
conflict of interest, employees must be
able to
separate their personal financial
interests from their business dealings.
Theft of time is the number one area of misconduct observed in the workplace. One example of misusing time in
the workplace is by engaging in activities that are not necessary for the job. It is believed that the average
employee steals 4.5 hours a week with late arrivals, leaving early, long lunch breaks, inappropriate sick days. All of
these activities add up to lost productivity and profits for the employers and relate to ethical issues in the area of
time theft.
Abusive and Intimidating Behavior
Abusive and intimidating behavior is the second most common ethical problem for employees. These concepts
can mean anything from physical threats, false accusations, profanity, insults, yelling. Abusive behavior can be
placed on a continuum from a minor distraction to a disruption of the workplace.

Misuse of Company Resources

Misuse of company resources has been identified as a leading issue in observed misconduct in organizations.
Issues might include spending an excessive amount of time on personal e-mails, submitting personal expenses on
company expenses reports, or using the company copier for personal use.

Conflict of Interest
A conflict of interest, one of the most common ethical issues identified by employees, exists when a person must
choose whether to advance his or her own personal interests or those of others. To avoid conflict of interest,
employees must be able to separate their personal financial interests from their business dealings.

Fairness and Honesty

Fairness and honesty are at the heart of business ethics and relate to the general values of decision makers.
Beyond obeying the law, businesspersons are expected not to harm customers, employees, clients, or
competitors. Honestly and fairness can relate to how the employees use the resources of the organization.
Fairness can be defined as being impartial and just, whereas honesty is defined as being truthful and trustworthy.
In contrast, dishonesty is usually associated with a lack of integrity, and lying.

Communications
Communications is another area in which ethical concerns may arise. False and misleading advertising, as quell as
deceptive personal-selling tactics, anger consumers and can lead to the failure of a business. Truthfulness about
product safety and quality are also important to consumers.

Business Relationships
The behavior of business persons toward customers, suppliers, and others in their workplace may also generate
ethical concerns. Ethical behavior within a business involves keeping company secrets, meeting obligations and
responsibilities, and avoiding undue pressure that may force others to act unethically. Managers in particular have
the opportunity to influence employees’ actions. It is responsibility of managers to create a work environment
that helps the organization achieve its objectives and fulfill its responsibilities. However, the methods that
managers use to enforce these responsibilities should not compromise employee rights. Plagiarism, presenting
someone else’s work as your own without mentioning the source, is another ethical issue. In business, an ethical
issue arises when an employee copies reports or present the work or ideas of others as his or her own.

CORPORATE SOCIAL RESPONSIBILITY OF BUSINESS

INTRODUCTION
Businesses generally are created or established to maximize profit through effective and efficient management of
human and material resources in line with their predetermined vision, mission, policy and goal(s). In the course of
maximizing profits companies annex natural resources- foreign and local, as a result impacting positively and
negatively in the environment where it exists. In other to remedy the problems brought about by the operations
of these companies to the people and environment where they operate, the management of these businesses
through rendering of some social services in turn pay back to the community, hence the concept corporate social
responsibility (CSR).

Thus far, we have discussed stakeholders mostly as individuals and groups outside the organization. This unit
focuses on the business firm as a stakeholder in its environment and examines the concept of a corporation as a
socially responsible entity conscious of the influences it has on society. That is, we look at the role companies, and
large corporations in particular, play as active stakeholders in communities. Corporations, by their sheer size,
affect their local, regional, national, and global communities. Creating a positive impact in these communities may
mean providing jobs, strengthening economies, or driving innovation. Negative impacts may include doing damage
to the environment, forcing the exit of smaller competitors, and offering poor customer service, to name a few.
This unit examines the concept of a corporation as a socially responsible entity conscious of the influences it has
on society.

Corporate Social Responsibility Defined

In recent years, many organizations have embraced corporate social responsibility (CSR), a philosophy (introduced
in Why Ethics Matter,) in which the company’s expected actions include not only producing a reliable product,
charging a fair price with fair profit margins, and paying a fair wage to employees, but also caring for the
environment and acting on other social concerns.

It is pertinent to mention that although the idea of CSR has existed for more than half a century, there is still no
consensus over its definition. CSR generally refers to business practices that are based on ethical values,
compliance with legal regulations, and respect for people and the environment (Dahlsrud 2006). CSR can also be
described as the commitment of businesses to contribute to sustainable economic development by working with
employees, the local community and the society at large to improve their lives in ways that are good for business
and for development (Lantos, 2001). CSR is considered as corporate citizenship, which essentially means that a
company should be a good neighbour within its host community (Freeman et al 2010). Carroll (2000) proposed a
popular four part definition of CSR, suggesting that corporations have four responsibilities (economic, legal,
ethical and philanthropic responsibilities) to fulfil before being considered as good corporate citizens. CSR can
sometimes be referred to as sustainability development and at such requires an organisation to pay attention to
the economic, environmental and social impacts of it activities (Gray, Owen, and Adams, 1996). Sustainability
development can be regarded as the practise of being accountable to stakeholders towards the aims of saving the
planet and the people, whilst making profits from doing so (GRI, 2010). The planet (environmental), the people
(social), and the profit (economic) goals of CSR (Sustainability development) is often referred to as the triple
bottom line, which is a term that was coined by John Elkington of Sustainability UK (Elkington, 2010).

OTHER DEFINITIONS
Social responsibility refers to businesses doing what they can to benefit their communities. CSR means that
business, in addition to maximizing shareholder value, must act in a manner that benefits society. CSR also means
that individuals and companies have a duty to act in the best interests of their environment and society as a
whole.

A socially responsible firm should not work solely for profit maximization but should also seek the welfare of
different sections of the society. Social responsibility of business refers to its obligations to take those decisions
and perform those actions which are acceptable in terms of the objectives and values of the society.

Many companies, such as those with “green” policies, have made social responsibility an integral part of their
business model. A socially responsible company shows concern for its “stakeholder”.
Corporate Social Responsibility

Visions:
According to Melo Neto and Froes (2001), the best way to analyze the concept of corporate social responsibility is
identifying the different views that exist. Some are the following:
 Corporate social responsibility as an ethical and responsible attitude and business conduct: It is the duty
and commitment of the organization to take a transparent, accountable and ethical stance, in its dealings
with its stakeholders (government, customers, suppliers, community, etc.).
 Social responsibility as a strategic business approach: The quest for social responsibility is seen as a social
action strategy that generates positive return to the business, i.e. the results are measured by revenue,
sales and market share.
 Social responsibility as a strategy of relationship: Aimed at improving the quality of relationship with its
various audiences, social responsibility is used as a strategy of relationship marketing, particularly with
customers, suppliers and distributors.
 Social responsibility as a human resources strategy: The actions are focused on employees and their
dependents, in order to satisfy them and therefore retain their top talent and increase productivity.
 Social responsibility as a strategy for recovery of products / services: The goal is not only to demonstrate
the quality of products / services of the company but also gives them the status of "socially correct".
 Social responsibility as a strategy for social development in the community: Social responsibility is seen as
a strategy for social development of the community. Thus, the organization takes over the role of agent of
local development, along with other community organizations and government itself.
 Corporate social responsibility as an exercise in ecological consciousness: The social responsibility is seen
as environmental responsibility. The company invests in education and environmental preservation, and
therefore, becomes a disseminator of values and environmental practices.

Therefore, it becomes that there are countless interpretations and definitions of Corporate Social
Responsibility, and each firm ends up acting in a way before themselves and society. In general, there isn‘t a
precise sense of social responsibility, thus appearing, with different theoretical concepts - social responsibility and
social obligation (Friedman, 1970), social responsibility and social approval (Davis and Blomstrom, 1975) and
social responsibility as a systemic approach stakeholders (Zadek, 1998).

Economic responsibility: "Companies have a responsibility of an economic nature, since they have a
responsibility to produce goods and services that society wants and sell them in a profitable way.
The basis for the functioning of a company is producing and selling goods for profit. Carroll (1979)
also notes that all the other responsibilities are impaired in the absence of economic responsibility,
because without them, the others become questionable. "
SOCIAL RESPONSIBILITIES FOR DIFFERENT INTEREST GROUPS
(1) Responsibility towards the Shareholders
 Shareholders are the owners of the company.
 The company should make all the efforts to maximize and protect shareholder’s
wealth.
 Sharing of useful information with the shareholders, utilization of funds etc.

(2) Responsibility towards the Workers

 Workers are the key persons behind company success.
 Management of the enterprise must provide the proper working conditions to the
workers.
 Workers should get fair salaries and wages.

(3) Responsibility towards the Consumers

 It is the consumer who buys the company’s product & services.
 So, it is the responsibility of the company to provide the right quality, right quantity
with the right price to the consumer.
 There should not be the unfair trade practices like adulteration, poor quality, courtesy
to the customers etc.

(4) Responsibility towards the Government & Community

 Enterprises must follow the laws and regulations of the country/ state in which it is
operating.
 The organisation should interact with society to know what they require.
 It should maintain proper infrastructure, proper disposal system and should not cause
harm to the society in any manner
 FACTORS THAT LED TO CSR CONCEPT
There are several factors which gave rise to the need to observe an increased responsibility of
the organizations. In a context of globalization and large-scale industrial change, new
concerns and expectations of citizens, consumers, public authorities and investors have
emerged.

Individuals and institutions, as consumers and / or as investors take progressively social

criteria in their decisions (e.g., consumers turn to social and eco labels to make
decisions to purchase products).

The damage to the environment caused by economic activities (eg oil spills, radioactive leaks)
has generated growing concern among citizens and various entities, pressuring companies to
comply with environmental requirements and calling for regulatory bodies, laws and
government production of appropriate legal frameworks and monitoring their
implementation.

The media and modern information and communication technology have subjected the
business and economic activity to a higher transparency. It has resulted in a fast and deeper
knowledge of business activities - both socially irresponsible (negative) and the ones that
represents the good examples (and, therefore, are capable of imitation) - with remarkable
consequences on the reputation and image of companies.

Critics argue that Corporate social responsibility (CSR) distracts from the fundamental
economic role of businesses; others argue that it is nothing more than superficial window-
dressing; others argue that it is an attempt to pre-empt the role of governments as a
watchdog over powerful multinational corporations (Carpenter, Bauer, & Erdogan,
2009).

REASONS AND BENEFITS FOR PARTICIPATING IN CSR

Kramer et al. (2006, December) state that companies use CSR because of:
1. Moral obligation – The companies engage in CSR since they believe it is their duty to be a
good citizen and “do the right thing”.

2. Sustainability – The company focuses on environmental and community stewardship with the
belief that it is best for the company in the long run. A good explanation for this comes from
the World Business Council who explains sustainability as follows: “Meeting the needs of the
present without compromising the ability of future generations to meet their own needs.”

3. License to operate - Many companies only engage in CSR because they are forced to since
they need to follow regulations and permissions from governments, communities and other
stakeholders to be able to conduct business.

4. Reputation - Many companies explain that they use CSR to improve the reputation and
company image, to strengthen the brand, in order to demonstrate moral and because it even
could raise the company’s stock value.

Kotler et al. (2005) has another view they describe that companies participate in CSR in order
to gain several benefits, they explain the following as the main ones:
1. Increased sales and market share - There is strong evidence that when customers make
decisions of which product to buy they consider factors such as the company’s participation in
CSR activities.

2. Improved brand positioning - When a company or a brand is associated with CSR it affects
the brand image and customers are likely to have a positive feeling towards it.

3. Improved image and clout - The company can gain positive publications about their CSR
activities in different reports and business magazines.

4. Increased ability to attract, motivate and retain employees - Employees working for
companies that participate in CSR-activities describes that they are proud of their company’s
values and that it motivates them.

5. Decreased operation costs - Many companies describes that their CSR activities result in
decreased operating costs and increased revenue. A company can for example reduce costs
for marketing campaigns, as it is common that the company gains increased free publicity as a
result of their CSR engagement.

6. Increased interest for investors and financial analysts - Some argue that CSR activities can
increase stock value and that it is easier for companies participating in CSR to get access to
capital.

Even though many argues that companies can gain enormous benefits from participating in
CSR
Kramer et al. (2006) explains that it is hard to determine what benefits a company really gets
from their CSR engagement. They continue to describe that analyses of benefits gained from
participating in CSR are inconclusive. Moreover, Kramer et al. argue that the connection
between good actions and customer attitudes are so indirect that it is impossible to measure.
However, they are convinced that CSR will become even more important for competitive
success in the near future.

Moreover, some argue that CSR do not affect the company at all, while others argue that CSR
even can affect the company negatively (McGuire et al, 1988). The main critic for CSR is that it
challenges the traditional corporate objective of profit maximization. Furthermore, many
argue that companies should maximize shareholder wealth not social welfare and that
managers do not have any obligation, right or experience to improve social issues (Clark-
Murphy, Gerrans,
Kristoffersen, 2005). Chairer, Hansen and Leung (2005) even claim that CSR activities can affect
the shareholder value negatively.
Smith (2007) believes the opposite, he argues that companies rated high in participation of
CSR have a better performance than companies scoring low at this dimension. Furthermore,
he argues that by engaging in CSR companies can gain a competitive advantage as well as
improved reputation.

Factors that Accounts for the Neglect of Social Responsibility

There are many factors that accounts for the apparent neglect of social responsibility in
Nigerian Business Enterprises. They include:
1. Relative small size of Nigerian business enterprises: The smallness in terms of size and
financial strength of social responsibility, as a task that must be seriously considered.
2. Profit maximization pursuit, by large enterprises owned by foreign firms to the detriment of
caring less for social responsibility. They see social responsibility on the part of the indigenous
businessmen as act of patriotic gesture on their part.

3. Unethical, business practice-dishonesty, embezzlement, smuggling, hoarding etc.

4. Limited educational background of many entrepreneurs.

5. Lack of initiative on the part of the government.

6. The general down turn of the economy resulting in off of employees while at the time, the
government is fighting to reduce unemployment, are working against national interests.

7. Lack of professionalism in management style: many Nigerian managers do not perceive

social responsibility as one of the key functions of management. Their training and experience
do not arouse such consciousness in them as some, considered it a novel, or at best informal
and intuitive managerial function.

Some of the foreign entrepreneurs come from countries where the consciousness for social
responsibility is at best in its basic infancy e.g. Britain, Taiwan, India etc.
Total reliance of publicly owned enterprises in the provision of services in rail, air, port,
broadcasting, (radio and television) health, postal and communication services, Electricity, Oil
drilling, refining and distribution, water, iron and steel etc. Since these large enterprises are
financed by the tax payers, it is assumed that they are socially responsible since, their pre-
occupation is in social welfare redistribution.

For our society to survive, practical importance must be attached to business social
responsibility such as its being attached to profit. The society should not be allowed to decay
or degenerate into slums, due to lack of attention but, all business owner, management,
creditors, employees, customers have a loud role to play in social responsibility by, supporting
social needs with company revenue thus, achieving credibility. It is highly expected on the part
of Nigerian business enterprises to have charitable and cultural programmes, get involved in
youth projects, make liberal donations to educational institutions, and be keenly interested in
the personal needs of the individuals who participate directly or indirectly in their organization

THEORETICAL FRAMEWORK
The Four-Part Model of Corporate Social Responsibility (CSR)
Carroll and Buchholtz in their ground-breaking research on CSR, came out with Four-Part
Model of Corporate Social Responsibility. This model considers CSR as encompassing the
economic, legal, ethical and philanthropic expectations placed on organizations by society at
any point in time. The four-part model is explained in detail below:
1. Economic Responsibility: Companies have shareholders who demand a reasonable return
on their investments; they have employees who want safe and fairly paid jobs; they have
customers who demand good quality products at a fair price. This is, by definition, the
fundamental reason for the establishment of businesses and thus a company’s first
responsibility is to be a properly functioning economic unit and to stay in business profitably.

2. Legal Responsibility: The legal responsibility of corporations demands that businesses abide
by the laws and ‘play by the rules of the game’. Laws are understood as the codification of
society’s moral views, and therefore abiding by these standards is a pre-requisite for any
further reasoning about social responsibilities. In other words, corporations must abide by
corporate legal requirements in order to continue being in business. As with economic
responsibility, the satisfaction of legal responsibility is required of all corporations seeking to
be socially responsible.

3. Ethical Responsibility: This responsibility obliges corporations to do what is right, just and
fair, even when they are not compelled to do so by the legal framework. For example, when
Shell Company sought to dispose of the Brent spar oil platform at sea in 1995, it had the full
agreement of the law and the British government, yet the company fell victim to a vigorous
campaign against the action by Green Peace as well as a consumer boycott. As a result, the
legal decision to dispose of the platform at sea was eventually reversed, since the firm had
failed to take into consideration society’s ethical expectations. Also, similar incidents have
occurred in the oil producing areas in the Niger Delta, where oil companies witnessed
destruction of their facilities due to the fact that the oil companies did not consider the social
and ethical interests of the communities in their operations.

4. Philanthropic Responsibility: The Greek work “Philanthropy” literally means “the love of
our fellow human beings” and by using this idea in a business context, it includes all those
issues that are within the corporation’s discretion to do in order to improve the quality of life
of employees, local communities and ultimat5ely the society at large. The emphasis is
therefore that today’s corporate behaviour must not only ensure adequate returns to
shareholders, adequate wages to employees, and quality products and services to customers,
it must also respond to societal and environmental concerns. Forward-looking modern
organizations are beginning to realize the long-term benefits of adopting a holistic stance in
their operations. It is only when a company’s operations encompass economic, social,
environmental and ecological concerns that a firm is considered to be genuinely a corporate
citizen (Hannigfeld, 2006).

A Case for Business Ethics

Side by side with corporate social responsibility practices is the important issue of business
ethics for the success of business activities. Great majority of business people do not even
know that there is something called ‘business ethics’ which can simply be defined as “doing
your business with truth and honesty and without the intention to injure or cheat anyone.”
Individuals and business organizations who do not factor-in ethics in their business operations
think that good product quality and low price for their products and services will lead them to
the promised land of profitability. Current research carried out by marketers and human
resources experts revealed that good business ethics and shop floor courtesies and
pleasantries are essential for building and retaining customer patronage in modern business
organizations.

VARIOUS WAYS BY WHICH A FIRM CAN BECOME SOCIALLY RESPONSIBLE

It is worthwhile providing, by way of summary, the various activities, programmes and
projects which an organization can undertake to earn the title of a socially responsible
company. These projects and programmes may include the following:
(1) Constructing roads and bridges, and building public schools in towns and various
communities.
(2) On the part of companies, providing employee welfare thorough giving them good pay,
other fringe benefits including housing and medical facilities.
(3) Providing parks, garages, recreation centre for public use.
 (4) Providing health-care facilities and making effort to protect the environment
(5) Funding research projects and encouraging the endowment of professional chairs in the
universities
(6) Sponsoring sporting activities nationally and internationally
(7) Contributing to welfare and security in communities, villages and towns
(8) Doing something to stem the tide of social ills, such as, armed robbery, prostitution,
kidnapping, drug-pushing, ritual killing, etc.

THEORIES OF THE FIRM

1. TRADITIONAL THEORY OF THE FIRM
The traditional theory of the firm is based on classical economics and the work of early
economists, such as David Ricardo and Leon Walras. The basic assumptions of the traditional
theory of the firm are
 Firms seek to maximize profits.
 Information symmetry. Owners and workers of the firm have access to good
information which enables them to maximize profits.
 Firms act as an homogenous unit with owners wishing to maximize profits and these
aims being achieved by managers and workers.
 To maximize profits a firm makes use of marginal analysis. In particular profit
maximization occurs at an output where marginal revenue = marginal cost.
 Firms and managers are rational. With their rational objectives being to maximize
profits.

Profit maximization
It is assumed that firms wish to maximize profits because this will enable the owners and
managers to maximize their own salary, bonus and dividends. To maximize profits, they will
seek to cut costs and set the profit maximizing price and level of output.

Whilst the traditional theory of the firm provides a starting point for investigating the behavior
of firms, the traditional theory of the firm is increasingly questioned by modern economists.

Criticisms of the traditional theory of the firm

 Firms are not a homogenous unit. Owners may want profit maximization, but managers and
workers may have different objectives.
 Other objectives to profit maximization. Profit maximization is not the only goal of a firm, it
could include maximizing sales, maximizing market share, social responsibility (e.g. looking
after the environment) and co-operatives which seek to improve the welfare of all society.
 Marginal approach to firms is not replicated in the real world. Businessmen do not have time
or the ability to work out the marginal cost and marginal revenues. They tend to use a rough
‘rule of thumbs’ such as average cost + profit margin.
 Imperfect information. Firms have imperfect information about prices, costs and competitors.
Also, workers are not like a typical factor of production. They may become demotivated or
discouraged if work appears boring or lacking in interest. This can affect the objectives of
firms.
 Behavioural economics. Recent behavioural economists, Thaler and Aversky state the
importance of human psychology in determining the behaviour of firms – a much more
complex set of circumstances than simple profit maximization.

2. THE NEOCLASSICAL THEORY OF THE FIRM

The Neoclassical Theory of the Firm, in its basic form, views the firm as a black box rational
entity. The theory is built on imaginary but plausible production and demand functions and it
establishes the principal of profit maximisation according to which profit is maximised when
marginal revenue is equal to marginal cost. The theory may be used to describe, among many
other things, various market structures, regulation issues, strategic pricing, barriers to entry,
economies of scale and scope and even optimum portfolio selection of risky assets.
The main weakness of the theory is that it assumes complete information and, as a result,
there is no agency problem or concern for transaction costs due to conflict between owners
and suppliers of inputs (even specific to whatever the firm produces) in the market system.
Another weakness of the theory is that it does not allow for firm evolution.

3. THE TRANSACTIONS COST THEORY OF THE FIRM

The Transactions Cost Theory of the Firm focuses on problems of asymmetric information
involved in transactions. The firm, according to this theory, comes into existence because it
successfully minimises ‘make’ inputs costs (through vertical integration) and ‘buy’ inputs costs
(using available markets). The more specific the inputs that the firm needs are the more likely
it is that it would produce them internally and/or acquire them through joint ventures and
alliances.
The weakness of this theory is that it does not take into consideration agency costs or firm
evolution, neither does it explain how vertical integration should take place in the face of
investments in human assets, with unobservable value, that cannot be transferred.

4. THE PRINCIPAL–AGENT THEORY OF THE FIRM

The Principal–Agent Theory of the Firm extends the neoclassical theory by adding agents to
the firm. The theory is concerned with friction due to asymmetric information between
owners of firms and their stakeholders or managers and employees; the friction between
agent and principal, requires precise measurement of agent performance and the engineering
of incentive mechanisms.
The weaknesses of the theory are many: it is difficult to engineer incentive mechanisms, it
relies on complicated incomplete contracts (borderline unenforceable), it ignores transaction
costs (both external and internal), and it does not allow for firm evolution.

5. THE EVOLUTIONARY THEORY OF THE FIRM

The Evolutionary Theory of the Firm places emphasis on production capabilities and process as
well as product innovation. The firm, according to this theory, possesses unique resources,
tied semi-permanently to the firm, and capabilities; the firm’s resources can be classified into
four categories: financial, physical, human and organisational. The theory sees the firm as a
reactor to change and a creator of change for competitive advantage. The firm, as a creator of
change, may cause creative destruction, which in turn may give birth to new industries and
enable sectors of, or entire, economies to grow. Although many countries have established
architectures to support entrepreneurial endeavours.
 The weakness of the theory remains: process and product innovation (especially the latter)
are mostly due to serendipity and as a result ‘entrepreneurship’ is a very expensive factor of
production; in the pursuit of profit and general wellbeing, it cannot be easily programmed
within a firm or a nation.

THREE APPROACHES TO CORPORATE RESPONSIBILITY

According to the traditional view of the corporation, it exists primarily to make profits. From
this money-centered perspective, insofar as business ethics are important, they apply to moral
dilemmas arising as the struggle for profit proceeds. These dilemmas include: “What
obligations do organizations have to ensure that individuals seeking employment or
promotion are treated fairly?” “How should conflicts of interest be handled?” and “What kind
of advertising strategy should be pursued?”

While these dilemmas continue to be important throughout the economic world, when
businesses are conceived as holding a wide range of economic and civic responsibilities as part
of their daily operation, the field of business ethics expands correspondingly. Now there are
large sets of issues that need to be confronted and managed outside of, and independent of
the struggle for money. Broadly, there are three theoretical approaches to these new
responsibilities:
1. Corporate social responsibility (CSR)
2. The triple bottom line
3. Stakeholder theory

Corporate Social Responsibility (CSR)

The title corporate social responsibility has two meanings. First, it’s a general name for any
theory of the corporation that emphasizes both the responsibility to make money and the
responsibility to interact ethically with the surrounding community. Second, corporate social
responsibility is also a specific conception of that responsibility to profit while playing a role in
broader questions of community welfare.

As a specific theory of the way corporations interact with the surrounding community and
larger world, corporate social responsibility (CSR) is composed of four obligations:

1. The Economic responsibility to make money. Required by simple economics, this obligation is
the business version of the human survival instinct. Companies that don’t make profits are—in
a modern market economy—doomed to perish. Of course there are special cases. Non-profit
organizations make money (from their own activities as well as through donations and grants),
but pour it back into their work. Also, public/private hybrids can operate without turning a
profit. In some cities, trash collection is handled by this kind of organization, one that keeps
the streets clean without (at least theoretically) making anyone rich. For the vast majority of
operations, however, there have to be profits. Without them, there’s no business and no
business ethics.

2. The Legal responsibility to adhere to rules and regulations. Like the previous, this
responsibility is not controversial. What proponents of CSR argue, however, is that this
obligation must be understood as a proactive duty. That is, laws aren’t boundaries that
enterprises skirt and cross over if the penalty is low; instead, responsible organizations accept
the rules as a social good and make good faith efforts to obey not just the letter but also the
spirit of the limits. In concrete terms, this is the difference between the driver who stays under
 the speed limit because he can’t afford a traffic ticket, and one who obeys because society as a
whole is served when we all agree to respect the signs and stoplights and limits.

3. The Ethical responsibility to do what’s right even when not required by the letter or spirit of
the law. This is the theory’s keystone obligation, and it depends on a coherent corporate
culture that views the business itself as a citizen in society, with the kind of obligations that
citizenship normally entails. When someone is racing their Porsche along a country road on a
freezing winter’s night and encounters another driver stopped on the roadside with a flat,
there’s a social obligation to do something, though not a legal one. The same logic can work in
the corporate world. Many industrial plants produce, as an unavoidable part of their
fabricating process, poisonous waste. True, it might not be the right thing to do in terms of
pure profits, but from a perspective that values everyone’s welfare as being valuable, the
measure could be recommendable.

4. The Philanthropic responsibility to contribute to society’s projects even when they’re

independent of the particular business. A lawyer driving home from work may spot the local
children gathered around a make shift lemonade stand and sense an obligation to buy a drink
to contribute to the neighborhood project. Similarly, a law firm may volunteer access to their
offices for an afternoon every year so some local school children may take a field trip to
discover what lawyers do all day. An industrial chemical company may take the lead in
rehabilitating an empty lot into a park. None of these acts arise as obligations extending from
the day-to-day operations of the business involved. They’re not like the responsibility a
chemical firm has for safe disposal of its waste. Instead, these public acts of generosity
represent a view that businesses, like everyone in the world, have some obligation to support
the general welfare in ways determined by the needs of the surrounding community.

Taken in order from top to bottom, these four obligations are decreasingly pressing within the
theory of corporate social responsibility. After satisfying the top responsibility, attention turns
to the second and so on. At the extremes, the logic behind this ranking works easily. A law firm
on the verge of going broke probably doesn’t have the responsibility to open up for school
visits, at least not if the tours interfere with the accumulation of billable hours and revenue.
Obviously, if the firm does go broke and out of business, there won’t be any school visits in any
case, so faced with financial hardship, lawyers are clearly obligated to fulfill their economic
obligations before philanthropic ones.

More difficult questions arise when the economic responsibility conflicts with the legal one.
For example, to remain profitable, an industrial plant may need to dispose of waste and toxins
in barrels that barely meet legally required strengths. Assuming those legal limits are
insufficiently strict to guarantee the barrels’ seal, the spirit of the law may seem violated. The
positive economic aspect of the decision to cut corners is the ability to stay in business. That
means local workers won’t lose their jobs, the familial stresses of unemployment will be
avoided, suppliers will maintain their contracts, and consumers will still be served.

Regardless, corporate social responsibility means every business holds four kinds of
obligations and should respond to them in order: first the economic, then the legal, next the
ethical, and finally the philanthropic.

The Triple Bottom Line

The triple bottom line is a form of corporate social responsibility dictating that corporate
leaders tabulate bottom-line results not only in economic terms (costs versus revenue) but
also in terms of company effects in the social realm, and with respect to the environment.
There are two keys to this idea. First, the three columns of responsibility must be kept
separate, with results reported independently for each. Second, in all three of these areas, the
company should obtain sustainable results.

The notion of sustainability is very specific. At the intersection of ethics and economics,
sustainability means the long-term maintenance of balance. As elaborated by theorists
including John Elkington, here’s how the balance is defined and achieved economically,
socially, and environmentally:
 Economic sustainability values long-term financial solidity over more volatile, short
term profits, no matter how high. According to the triple-bottom-line model, large
corporations have a responsibility to create business plans allowing stable and
prolonged action. That bias in favor of duration should make companies hesitant about
investing in things like dot-coms. Silicon Valley, California, for example, is full of small,
start-up companies. A few will convert into the next Google, Apple, and Microsoft.
Sustainability as a virtue means valuing business plans that may not lead to quick riches
but that also avoid calamitous losses.

 Social sustainability values balance in people’s lives and the way we live. A world in
which a few Fortune 500 executives are hauling down millions a year, while millions of
people elsewhere in the world are living on pennies a day can’t go on forever. As the
imbalances grow, as the rich get richer and the poor get both poorer and more
numerous, the chances that society itself will collapse in anger and revolution increase.

Social sustainability doesn’t end with dollars or naira; it also requires human respect.
All work, the logic of stability dictates, contains dignity, and no workers deserve to be
treated like machines or as expendable tools on a production line.

Finally, social sustainability requires that corporations as citizens in a specific

community of people maintain a healthy relationship with those people.

 Environmental sustainability begins from the affirmation that natural resources—

especially the oil fueling our engines, the clean air we breathe, and the water we drink
—Further, the case of an industrial chemical company pouring toxins into the ground
that erupt years later with horrific consequences evidences this: not only are resources
finite, but our earth is limited in its ability to naturally regenerate clean air and water
from the smokestacks and runoff of our industries. Sustainability, finally, on this
environmental front means actions must be taken to facilitate our natural world’s
renewal. Recycling or cleaning up contamination that already exists is important here,
as is limiting the pollution emitted from factories, cars, and consumer products in the
first place. All these are actions that corporations must support, not because they’re
legally required to do so, but because the preservation of a livable planet is a direct
obligation within the triple-bottom-line model of business responsibility.
Together, these three notions of sustainability—economic, social, and environmental—guide
businesses toward actions fitted to the conception of the corporation as a participating citizen
in the community and not just as a money machine.
It’s important to note that while sustainability as a business goal puts the breaks on the
economic world, and is very conservative in the (nonpolitical) sense that it favors the current
situation over a changed one, that doesn’t mean recommending a pure freeze. Sustainability
isn’t the same as Ludditism, which is a flat resistance to all technological change.

Stakeholder Theory
Stakeholder theory, which has been described by Edward Freeman and others, is the mirror
image of corporate social responsibility. Instead of starting with a business and looking out
into the world to see what ethical obligations are there, stakeholder theory starts in the world.
It lists and describes those individuals and groups who will be affected by (or affect) the
company’s actions and asks, “What are their legitimate claims on the business?” “What rights
do they have with respect to the company’s actions?” and “What kind of responsibilities and
obligations can they justifiably impose on a particular business?” In a single sentence,
stakeholder theory affirms that those whose lives are touched by a corporation hold a right
and obligation to participate in directing it.

As a simple example, when a factory produces industrial waste, a CSR perspective attaches a
responsibility directly to factory owners to dispose of the waste safely. By contrast, a
stakeholder theorist begins with those living in the surrounding community who may find their
environment poisoned, and begins to talk about business ethics by insisting that they have a
right to clean air and water. Therefore, they’re stakeholders in the company and their voices
must contribute to corporate decisions. It’s true that they may own no stock, but they have a
moral claim to participate in the decision-making process. This is a very important point. At
least in theoretical form, those affected by a company’s actions actually become something
like shareholders and owners. Because they’re touched by a company’s actions, they have a
right to participate in managing it.

Who are the stakeholders surrounding companies? The answer depends on the particular
business, but the list can be quite extensive. If the enterprise produces chemicals for industrial
use and is located in a small Massachusetts town, the stakeholders include:
 Company owners, whether a private individual or shareholders
 Company workers
 Customers and potential customers of the company
 Suppliers and potential suppliers to the company
 Everyone living in the town who may be affected by contamination from workplace
operations
 Creditors whose money or loaned goods are mixed into the company’s actions
 Government entities involved in regulation and taxation
 Local businesses that cater to company employees (restaurants where workers have
lunch, grocery stores where employee families shop, and similar)
 Other companies in the same line of work competing for market share
 Other companies that may find themselves subjected to new and potentially
burdensome regulations because of contamination at that one Massachusetts plant

The first five on the list—shareholders, workers, customers, suppliers, and community—may
be cited as the five cardinal stakeholders.

In practical terms, however, a strict stakeholder theory—one insistently bestowing the power
to make ethical claims on anyone affected by a company’s action—would be inoperable.
There’d be no end to simply figuring out whose rights needed to be accounted for.
Realistically, the stakeholders surrounding a business should be defined as those tangibly
affected by the company’s action. There ought to be an unbroken line that you can follow
from a corporate decision to an individual’s life.

Adapt voluntary codes of

governance and ethics Ethical

Responsibilities

Ensure good relations with Legal

government officials
Responsibilities

Set aside funds for corporate

Philanthropic
social/
Responsibilities
community projects

Provide investment, create job Economic

and pay Responsibilities

taxes
Africa´s Corporate Social Responsibility Pyramid (Rahbek Pedersen & Huniche,
2006 with modification)