Chapter Notes

Introduction to Social Responsibility and Ethics

Every business operates within a society. Just as individuals have obligations to respect social values and norms, businesses are also expected to earn money in ways that meet society's expectations. A business is allowed by society to conduct commercial activities and earn profits, but it must not do anything that society considers undesirable.

• Socially Undesirable Practices: These are actions that may increase a company's profit but harm society. Examples include selling adulterated goods, creating misleading advertisements, evading taxes, polluting the environment, and exploiting workers.
• Socially Desirable Practices: These are actions that benefit society and improve a company's image, often leading to long-term profitability. Examples include supplying good quality products, ensuring healthy working conditions, paying taxes honestly, and installing pollution control devices.

Concept of Social Responsibility

Social responsibility of business refers to its obligation to make decisions and perform actions that are desirable according to the objectives and values of our society. This means a business should not only focus on its own profit but also contribute to the aspirations of the community.

This idea challenges the traditional view that a business exists only to maximize profits for its owners. Instead, it suggests that a responsible business must consider how its actions affect the lives of other people.

Social Responsibility vs. Legal Responsibility

Social responsibility is a broader concept than legal responsibility.

• Legal responsibility is fulfilled simply by obeying the law.
• Social responsibility goes further. It includes a firm's recognition of social obligations that are not necessarily covered by law. It involves voluntary actions taken for the benefit of society.

Need for Social Responsibility

A major debate in business is whether an enterprise should be run solely for the profit of its owners or if it has a duty to serve other groups like customers, employees, and the community. This is an ethical issue about what is morally right or wrong. Since social responsibility is often voluntary, businesses have the freedom to decide if and how they will serve society. This leads to arguments both for and against businesses taking on social responsibilities.

Arguments for Social Responsibility

There are several strong arguments for why businesses should be socially responsible:

• Justification for Existence and Growth: Businesses exist to provide goods and services that satisfy human needs. Profit should be seen as the result of serving people. A business can only prosper long-term by continuously serving society.
• Long-term Interest of the Firm: A business gains maximum profits in the long run when its highest goal is "service to society." If workers, consumers, and government officials feel a business is not serving their interests, they may withdraw their cooperation. A good public image from supporting social goals is in the firm's own best interest.
• Avoidance of Government Regulation: Government regulations limit a business's freedom. By voluntarily taking on social responsibilities, businesses can reduce the need for new laws and government interference.
• Maintenance of Society: Laws cannot cover every situation. If people feel they are not getting a fair deal from businesses, they may engage in anti-social activities that harm the business itself. Therefore, it is better for businesses to assume social responsibilities to help maintain a stable society.
• Availability of Resources with Business: Businesses have significant financial and human resources, including managerial talent and capital. They can use these resources effectively to help solve society's problems.
• Converting Problems into Opportunities: Businesses are skilled at turning risky situations into profitable ventures. They can apply this skill to social problems, not only solving them but also making them useful opportunities.
• Better Environment for Doing Business: A society with many complex problems is a difficult environment for a business to succeed in. By helping solve social issues, a business creates a better, more stable environment for its own operations.
• Holding Business Responsible for Social Problems: Some social problems, like environmental pollution, unsafe workplaces, and corruption, have been created or worsened by business activities. Therefore, it is the moral obligation of businesses to help solve these problems.

Arguments against Social Responsibility

There are also arguments against businesses taking on social responsibilities:

• Violation of Profit Maximisation Objective: This view holds that a business exists only to maximize profit. Any action focused on social responsibility is seen as a distraction from this primary goal. Proponents argue that a business best serves society by being efficient, reducing costs, and maximizing profits.
• Burden on Consumers: Socially responsible activities, like pollution control, can be very expensive. Businesses might pass these costs on to consumers by charging higher prices. This is seen as an unfair tax on consumers in the name of social responsibility.
• Lack of Social Skills: Business problems and social problems are different. Businesspeople may not have the necessary training or understanding to solve complex social issues. These problems, it is argued, should be handled by specialized agencies.
• Lack of Broad Public Support: The public may not want businesses to be involved in social programs. A lack of public confidence and cooperation could make it impossible for a business to succeed in these areas.

The Reality of Social Responsibility

In reality, the attitude of business people is changing. There is a growing realisation that businesses have social obligations to fulfill. While some of this may be "lip service" to ensure survival, many businesses understand that to succeed in a democratic society, they must act responsibly. Several forces have pushed businesses to consider their social responsibilities:

• Threat of Public Regulation: Modern governments are expected to protect all sections of society. If a business acts irresponsibly, the government may regulate it. This threat is a major reason why businesses are concerned with social responsibility.
• Pressure of Labour Movement: Over the last century, labour has become more educated and organized. Powerful labour movements have forced businesses to prioritize the welfare of their workers.
• Impact of Consumer Consciousness: With more education, mass media, and market competition, consumers are more aware of their rights and power. The old principle of caveat emptor (let the buyer beware) has been replaced by the idea that the "customer is king."
• Development of Social Standards for Business: Society no longer sees business as just a way to make money at any cost. New social standards demand that businesses serve social needs.
• Development of Business Education: Business education now includes the concept of social responsibility, making consumers, investors, and employees more sensitive to social issues.
• Relationship between Social and Business Interest: Businesses are realizing that social interests and business interests are not contradictory but complementary. A business benefits in the long run by serving society well.
• Development of a Professional, Managerial Class: A new class of professional managers, educated in modern management institutes, is more interested in satisfying multiple interest groups (not just owners) to run the enterprise successfully.

Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) is a concept closely related to social responsibility. It refers to the role companies can play in achieving sustainable development by balancing economic progress, social progress, and environmental protection.

• The European Commission defines CSR as "the responsibility of enterprises for their impacts on society."
• The World Business Council for Sustainable Development defines it as "the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families, as well as, of the community and society at large."

CSR in India under the Companies Act, 2013

In India, CSR is governed by Clause 135 of the Companies Act, 2013. The provisions apply to companies meeting certain financial criteria:

• Annual turnover of ₹1,000 crore or more, OR
• Net worth of ₹500 crore or more, OR
• Net profit of ₹5 crore or more.

Key rules under the Act (applicable from fiscal year 2014-15) include:

1. Companies must set up a CSR committee of their board members.
2. The Act encourages companies to spend at least 2% of their average net profit from the previous three years on CSR activities.
3. Approved CSR activities are listed in Schedule VII of the Act.
4. Only CSR activities undertaken in India are considered.
5. Activities that benefit only employees and their families do not qualify as CSR.

Kinds of Social Responsibility

The social responsibility of a business can be divided into four categories:

1. Economic Responsibility: This is the most basic responsibility. A business is an economic entity, so it must produce goods and services that society wants and sell them at a profit.
2. Legal Responsibility: Every business must operate within the laws of the country. A law-abiding enterprise is a socially responsible enterprise.
3. Ethical Responsibility: This includes behaviour that society expects but is not written into law. It involves voluntary actions. [!example] Respecting religious sentiments and the dignity of people in advertisements is an ethical responsibility.
4. Discretionary Responsibility: This is a purely voluntary obligation. It includes actions like making charitable contributions to educational institutions or helping people affected by natural disasters.

Social Responsibility Towards Different Interest Groups

A business has responsibilities towards various groups that have an interest in its operations.

Responsibility Towards Shareholders or Owners

• Provide a fair return on their capital investment.
• Ensure the safety of their investment.
• Provide regular, accurate, and complete information about the company's performance and future plans.

Responsibility Towards Workers

• Provide opportunities for meaningful work.
• Create the right kind of working conditions to win their cooperation.
• Respect their democratic right to form unions.
• Ensure a fair wage and fair treatment from management.

Responsibility Towards Consumers

• Supply goods and services of the right quality and quantity at reasonable prices.
• Take precautions against adulteration, poor quality, and dishonest advertising.
• Provide complete information about the product and the company to help them make purchasing decisions.

Responsibility Towards the Government and Community

• Respect the laws of the country.
• Pay taxes regularly and honestly.
• Behave as a good citizen and act according to society's values.
• Protect the natural environment and avoid pollution and ugly or dirty working conditions.

Business and Environmental Protection

Protecting the environment—the totality of our natural and man-made surroundings—is a serious issue for businesses. The quality of our environment is deteriorating, largely due to industrial activity.

Pollution is the injection of harmful substances into the environment. It is mainly a result of industrial production. Pollution harms human life, animal life, and degrades our living conditions.

Causes of Pollution

While all sectors of society generate waste, industry is a major source of pollutants, which are the discarded materials or chemicals from production and consumption. Business activities are a critical source of pollution. The main types of pollution caused by businesses are:

• Air Pollution: Caused by factors that lower air quality, such as carbon monoxide from vehicles and smoke or chemicals from factories. This has led to problems like a hole in the ozone layer and global warming.
• Water Pollution: Occurs when chemical and other wastes are dumped into rivers, streams, and lakes. This has killed animals and poses a serious threat to human life.
• Land Pollution: Caused by the dumping of toxic wastes on land. This damages soil quality, making it unfit for agriculture. Restoring damaged land is a major challenge.
• Noise Pollution: The noise from factories and vehicles is a serious health hazard. It can cause hearing loss, heart problems, and mental disorders.

Need for Pollution Control

Controlling pollution is essential to preserve our environmental resources and improve quality of life. The main reasons for pollution control are:

• Reduction of Health Hazards: Many serious diseases like cancer, heart attacks, and lung complications are caused by pollutants. Pollution control can check these diseases and support a healthy life.
• Reduced Risk of Liability: A business can be held liable and forced to pay compensation to people harmed by its pollution. Installing pollution control devices is a sound business policy to reduce this risk.
• Cost Savings: Effective pollution control can save money. For example, better production technology can reduce waste, which in turn lowers the cost of waste disposal and cleaning.
• Improved Public Image: As society becomes more environmentally conscious, a firm that works to protect the environment will enjoy a good reputation and be seen as socially responsible.
• Other Social Benefits: Pollution control leads to benefits like clearer visibility, cleaner buildings, a better quality of life, and the availability of natural products in a purer form.

Role of Business in Environmental Protection

Protecting the environment is a collective responsibility, but businesses should take the lead. They are major creators of wealth and technology and have the financial and human resources to solve environmental problems. Some specific steps businesses can take include:

• Top Management Commitment: Top managers must create a work culture that prioritizes environmental protection.
• Shared Commitment: Ensure that all employees and divisions are committed to protecting the environment.
• Clear Policies and Programmes: Develop policies for using good quality raw materials, superior technology, and scientific waste disposal techniques.
• Compliance with Laws: Obey all government laws and regulations for pollution prevention.
• Participation in Government Programmes: Take part in government initiatives like cleaning rivers, planting trees, and checking deforestation.
• Periodical Assessment: Regularly evaluate pollution control programs to measure progress.
• Education and Training: Arrange workshops to share technical information with suppliers, dealers, and customers to get them involved in pollution control.

Business Ethics

While the goal of a business is to earn a profit, its actions must align with the expectations of society. Ethics is the study of what is right and wrong in human behaviour, based on a standard of conduct approved by society.

Concept of Business Ethics

Business ethics refers to the socially determined moral principles that should govern business activities. It is concerned with the relationship between business objectives and practices and the good of society.

Ethical behaviour goes beyond just obeying laws. It means adhering to moral principles and acting in a way that is just and fair. Because businesspeople control significant resources, they have a major impact on society and are expected to uphold high ethical standards.

Elements of Business Ethics

To foster ethics in their daily operations, businesses can focus on these basic elements:

1. Top Management Commitment: The CEO and other senior managers must be openly and strongly committed to ethical conduct. They must provide continuous leadership in upholding the organization's values.
2. Publication of a 'Code': An enterprise should define its principles of conduct in a written document called a "code". This code typically covers areas like honesty, product safety, workplace health and safety, conflicts of interest, and fair marketing practices.
3. Establishment of Compliance Mechanisms: To ensure rules are followed, businesses should establish mechanisms like:
   • Considering values and ethics during hiring.
   • Including corporate ethics in training programs.
   • Regularly auditing performance to check for compliance.
   • Creating systems for employees to report unethical behaviour.
4. Involving Employees at All Levels: Since employees are the ones who implement ethics policies, their involvement is crucial. Small groups can be formed to discuss policies and attitudes.
5. Measuring Results: While difficult to measure precisely, a firm can audit its operations to monitor compliance with ethical standards. The results can then be discussed to determine the future course of action.