In the early days, the primary focus of companies was on maximising their profitability and earns as much revenue as they could. Profitability was the main objective for the firms. It was the central aspect of their operations (Hopkis, 2012). However, with time this focus has evolved to companies becoming more environmentally cautious. Now they pay more emphasis on performing the CSR activities and in the process also improve its image in the market (Carroll, 2008). This report presents different theories of CSR to determine to what extent companies have been successful in transitioning their focus from being a profit-oriented enterprise to CSR based operations. Herein advantages and disadvantages of shareholder and stakeholder theories have been discussed along with the CSR pyramid, as suggested by Carroll.
This theory was developed by Milton Friedman and argues that taking up social responsibility is not the responsibility of a business organisation (Friedman and Miles, 2002). According to the theory, the only responsibility of a company is to work for the interest of its shareholders. A company is only answerable to its shareholders, i.e. the people who have invested in the firm. If the enterprise is able to satisfy its shareholders, then this would indicate that the company has been able to perform to the best of its abilities. Herein it may not be wrong to say that the sole purpose of a business entity is to earn maximum profits and strengthen its position in the industry. Throughout history, there have been several examples of companies that have been associated with certain scandals and fraudulent activities so that they can satisfy the shareholders. One of the biggest examples of this is the Enron scandal. The company used different accounting loopholes, special purpose entities and poor financial reporting measures to hide billions of dollars in debt as a result of many failed deals and projects. The CFO and many Board executives missed the audit meetings on purpose, but they also put pressure on high ranking officials in the company to ignore the issue altogether. This clearly indicates that Enron primary goal to maximise its profitability and also maintain a positive and strong image among the shareholders.
One of the biggest points that underline advantages of the theory is that it highlights the true purpose of a business organisation. Every company, regardless of the industry or market space that it might be a part of, tries to maximise its performance and profitability. If a company is not able to earn profits, then it might have to face many issues in sustaining in the market. Zhu and Zhang (2015) stated that increasing its profitability is the central aspect of any company’s operations. It is the most effective way through which a company can sustain in the market and also maintain its competitive advantage.
Friedman while defining and explaining the shareholder theory stated that companies should maximise their profitability and increase returns to the shareholders at any cost, but they should never engage in deception or fraudulent activities (Zheng, Luo and Wang, 2014). Friedman suggested that firms should stay away from deceiving the customers. This is a very big advantage of the theory as it discourages companies from engaging in or following such practices. This way the management can focus on aspects such as improving the overall quality of products and services sold by the company, customer satisfaction, etc.
Freeman (2010) argued that maximising interests of the shareholders has been ingrained in the financial community that the leaders and managers fail to recognise that it is not their only duty. In this regard, Schwartz (2017) stated that a company has to do so much more than just maximising the returns of the shareholders. However, the shareholder theory prevents them from taking such actions. Rather, it encourages the managers to take such decisions that might have a negative impact on the ethical position of the company. The Enron scandal is the perfect example of this. The management decided not to show the financial losses it had been experiencing, just to ensure that its profitability is not adversely affected. They lied from the stakeholders and presented the company as a profitable enterprise, so as to ensure that the shareholders get the maximum returns from their investments. Although Friedman had stated that companies should not carry out any fraudulent activities to maximise their profitability, the majority of the business leaders and managers have forgotten this part. Saeidi and Saaeidi (2015) argue that the worst thing about this situation is that nobody is reminding them about this aspect. According to Quarshie, Salmi and Leuschner (2016) in a way the shareholder theory is encouraging the leaders and managers to perform deceive the stakeholders so that they can increase the profitability of the company.
The Stakeholder Theory was first described by Dr F. Edward Freeman, a professor at the University of Virginia, in his landmark book, “Strategic Management: A Stakeholder Approach.” It suggests that shareholders are merely one of many stakeholders in a company (Freeman, 2010). Thus firms should focus on the satisfaction of the stakeholders and not the shareholders alone. According to the theory, the real success of a company lies in how well it is able to satisfy the needs and demands of its stakeholders (Ali and Sarasvathy, 2012). The happier they are, the better would be the firm’s performance and profitability. This theory opposes the one developed by Milton Friedman, which states that the only group of stakeholders that a company should aim at satisfying are the shareholders. It is based on the fact that firms operate in a capitalist environment and they have to fulfil every demand of the shareholders, as they have invested their money in the firm (Saeidi and Saaeidi, 2015). It becomes their moral obligation to ensure that the shareholders are happy and their interests have been fulfilled. This is the best way for the company to sustain in the market.
The stakeholder theory states that fulfilment of interests of the stakeholders is of paramount importance for companies instead of shareholders’ interests along. This theory was developed in the 90s and stated that since the 60s number of stakeholder groups associated with the operations of a company has increased significantly (Rupp, Aryee and Luo, 2015). It is considered one of the key theories related to CSR functions. Through this theory, companies can pay more attention to ensuring that the demands and interests of the stakeholders are fulfilled. It does not provide any room for the fulfilment of interests of the shareholders alone. This means that the theory gives emphasis on ensuring that the stakeholders are happy and satisfied. According to the theory, even if shareholders are unhappy, then as well the company will be able to function adequately (Carroll, 1979). Thus it may be said that the theory suggests firms to focus on the satisfaction of the stakeholders and not only on maximising their profitability.
One of the best examples of companies following the stakeholder theory is Coca-Cola. The company gives emphasis on ensuring that its operations are carried out as ethically and socially responsible as possible. This way the company strives to maintain a strong and positive image in the market while ensuring that the stakeholders are happy and satisfied. In this regard, the company follows four core principles for effective stakeholder engagement – transparency, inclusivity, consistency and accountability (2017 Sustainability Report: Stakeholder Engagement., 2018). Through these principles, the company strives to build and maintain its relations with the stakeholders and ensures that their needs and demands are fulfilled to the greatest extent possible (Chakrabarty and Bass, 2015).
The customers want to purchase goods and services of a company that provides the best quality at lower prices, but they want to associate with an organisation that works for the benefit of the society as well (Tai and Chuang, 2014). In this regard even if a company provides the best quality products at low prices, but its suppliers are not satisfied because they have not been paid or the company does not perform any CSR activities, then the customers would try to avoid making any purchase from the company. This would eventually have a negative impact on the firm as it would start losing its customers and eventually its profitability would decrease. On the other hand, a company that focuses only on the interests of its shareholders will not be able to make any kind of money and thus would not be able to satisfy the shareholders as well (Setó-Pamies and Papaoikonomou, 2016).
Moreover, due to the hyper-competitive nature of the modern-day market, almost every company can be replaced. Another organisation can replace a company. Therefore, it may not be wrong to say that another organisation will replace a firm that does not provide satisfaction to its shareholders. There have been many companies that have had such experiences (Wu and He, 2015). Due to this reason, it can be said that even in a capitalist environment, the firms, regardless if they are new or already established, should follow the interests of the stakeholders and not the shareholders alone.
There are a number of aspects that companies have to pay attention to a wide variety of aspects so as to ensure that the firm is able to achieve its goals and objectives. It is imperative that companies fulfil their ethical responsibilities as they have a significant impact on society (Farooq, Merunka and Valette-Florence, 2014). If the firm carries out its functions in an ethical manner, then there it could help the society to grow and develop. The theory justifies the CSR function for three reasons. However, it can be said that companies need to manage businesses in such a way that they can improve their performance as well as their sustainability in the market. According to Strand, Freeman and Hockerts (2015) ethics is an important part of operations of an organisation. Every company needs to ensure that its functions and processes are carried out in an ethical manner. This way the firm can develop a strong and positive image in the market. It may be said herein that ethics has a significant impact on overall performance of the company. It also affects the sustainability of a firm in the market (Schrempf-Stirling, Palazzo and Phillips, 2016).
Another model of CSR is the CSR Pyramid. It sheds light on how and why companies should meet their social responsibilities. There are four pillars of this model, as shown in Figure 2. Herein it can be said that the first and foremost responsibility of an organisation is to improve its own economic position. This means that firms should give importance to enhancing their performance and maintain their profitability. The legal responsibility entails following all rules and regulations laid down by the government. The third responsibility under this model of companies is to conduct their operations in an ethical manner. They should not cheat with the customers or any other such stakeholder and must provide services that may best satisfy their demands. The last responsibility is to help in the development of the community. On this basis, it can be said that companies need to generate revenue and earn profits along with achieving the interests of the shareholders, but they must not forget that they have a responsibility towards the stakeholders such as customers, employees, community, government, etc.
According to the model, the most basic and key responsibilities of an organisation is economic in nature. This means that every company, regardless of the market that it may be a part of, strives to perform better than its competitors in economic terms. According to Kolk (2016), it is the responsibility of a firm to produce and sell goods at a profit. Frynas and Stephens (2015) further state that every other aspect of operations of a company is dependent on this functionality.
Every company has to abide by the rules and regulations of the land that it operates on. Husted (2015) stated that it is another very basic responsibility of a business. Firms have to follow the rules and regulations lay down by the government of the region that they are functioning in. This is equally applicable to international or multinational firms as well.
Even though the above two principles state that companies should perform their operations in an ethical manner, there are certain additional ethical principles as well that the firms should abide by. Farooq, Rupp and Farooq (2017) stated that they are embedded in the society that the firm is a part of. A business has to act as a member of the society and should contribute towards its growth and prosperity. The company should not be associated with any fraudulent or illegal activities.
These can be defined as those responsibilities that the company wants to perform on its own. For such responsibilities, there is no particular code of aspect that has to be considered. Rather it is associated with the willingness of the company to help the society more in its growth and development (Jamali and Karam, 2018). It is not necessary for the firm to carry out such responsibilities.
During the study, it was observed that even though initially companies and business firms were more focused on maximising their profitability, but now their outlook has changed completely. Firms are giving more attention towards performing different CSR activities so that they can help in the overall development of the society. Though the shareholder theory helps companies to increase their profits, it in a way also encourages them to carry out illegal activities so that their profitability can be further increased. Similarly, advantages and disadvantages of the stakeholder theory were also discussed in the report.
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