Social Responsibility

To Whom Are Organizations Socially Responsible?

• Social responsibility is a business's obligation to pursue policies, make decisions, and take actions that benefit society.

• Differing views exist on to whom and for what in society organizations are responsible.

• Apple's refusal to decrypt an attacker's iPhone for the FBI sparked debate on principled stance versus potential harm to society.

Shareholder Model

• The shareholder model posits that an organization's only social responsibility is to satisfy its owners (shareholders) by maximizing profits.

• Economist Milton Friedman argued that diverting resources to social causes is socially irresponsible.

• Problems with diverting resources to social causes:

  • Organizations cannot effectively act as moral agents for all shareholders due to differing views on social causes.
  • It undermines market efficiency by reducing funds for quality materials, talented workers, and valuable products, ultimately hurting customers, suppliers, employees, and shareholders.

• Economist Russell Roberts suggests companies should focus on making good products at fair prices, allowing consumers to donate savings to their chosen charities.

Stakeholder Model

• Under the stakeholder model, management's most important responsibility is the firm's long-term survival, achieved by satisfying the interests of multiple corporate stakeholders.

• Stakeholders are persons or groups with a legitimate interest in a company and are affected by its actions.

• Salesforce.com CEO Marc Benioff advocates for all stakeholders, including employees, customers, community, and the environment.

• Salesforce has a "1-1-1" philosophy, donating 1% of founding stock, 1% of employee time (6 paid days of volunteer time), and 1% of its product to nonprofits and education institutions.

• So far, Salesforce has given more than $240 million in grants, 3.5 million hours of community service, and provided product donations for more than 39,000 nonprofits and education institutions

• According to Benioff, " … we have given more than $240 million in grants, 3.5 million hours of community service, and provided product donations for more than 39,000 nonprofits and education institutions

• Benioff states that "the business of business is improving the state of the world."

Identifying and Balancing Stakeholder Needs

• Exhibit 4.7 illustrates how stakeholder groups may influence the firm to advance their interests.

Primary vs. Secondary Stakeholders

• Primary stakeholders are crucial for long-term survival and include shareholders, employees, customers, suppliers, governments, and local communities.

• Secondary stakeholders, like the media and special interest groups, can influence the company and public perceptions but are not critical for long-term survival.

• When balancing stakeholder needs, the stakeholder model prioritizes primary stakeholders.

• Addressing primary stakeholder concerns is vital, as dissatisfaction can seriously harm the company.

• Addressing the concerns of primary stakeholders is important because if a stakeholder group becomes dissatisfied and terminates its relationship with the company, the company could be seriously harmed or go out of business.

• Secondary stakeholders can affect public perceptions of socially responsible behavior.

Differing Views on Social Responsibility

• Some argue organizations are only responsible to shareholders.

• The Council of Institutional Investors (CII) emphasizes accountability to company owners for long-term shareholder value.

• Professors Michael Mauboussin and Alfred Rappaport argue that satisfying all stakeholders simultaneously is impossible and should not be the singular governing objective.

• CII's executive director, Ken Bertsch, states that "There has to be a north star, and it's long-term shareholder value."

• Many top managers now believe companies must be socially responsible to stakeholders.

• The Business Roundtable, representing CEOs of major American companies, shifted from the shareholder model to the stakeholder model in August 2019.

• Their revised statement committed to delivering value to customers, investing in employees, dealing fairly with suppliers, supporting communities, and generating long-term shareholder value.

• Mastercard's Ajay Banga argues that considering the interconnected system of people making and spending money benefits companies in the long run.

• Today, surveys indicate that as many as 80 percent of top-level managers believe that it is unethical to focus just on shareholders.

• Thirty-five states have changed their laws to allow company boards of directors to consider the needs of employees, creditors, suppliers, customers, and local communities, as well as those of shareholders

• A majority of opinion makers would argue that companies must be socially responsible to their stakeholders.

For What Are Organizations Socially Responsible?

• Companies can best benefit their stakeholders by fulfilling their economic, legal, ethical, and discretionary responsibilities.

• Economic and legal responsibilities are at the base of the pyramid, emphasizing their fundamental importance.

Economic Responsibility

• Economic responsibility is a company's social responsibility to make a profit by producing a valued product or service.

• Historically, this has been a business's most basic social responsibility.

• Companies that don't meet financial expectations face immense pressure, with boards quickly firing CEOs after consecutive bad quarters.

• According to the Conference Board, 16 to 29 percent of CEOs of large companies are fired each year.

• However, CEO firings reached an all-time high of 30.5 percent in 2018 among large Standard and Poor 500 companies (as measured by stock market value).

Legal Responsibility

• Legal responsibility is a company's social responsibility to obey society's laws and regulations while meeting its economic responsibilities.

• Volkswagen violated legal responsibilities by using software to falsify emissions tests.

  • VW agreed to pay over $33.6$ billion in settlements and fines, including payments of $5,000$ to $10,000$ to each owner of a VW diesel car and $4.3$ billion in civil and criminal penalties.
  • ''Volkswagen deeply regrets the behavior that gave rise to the diesel crisis," the company said in a statement. ''The agreements that we have reached with the US government reflect our determination to address misconduct that went against all of the values Volkswagen holds so dear."
  • It also set aside an additional $10$ billion for possible future claims.

Ethical Responsibility

• Ethical responsibility is a company's social responsibility not to violate accepted principles of right and wrong when conducting its business.

• Apple acknowledged slowing down older iPhones to extend battery life, offering a public apology and reduced-price battery replacements.

• This decision cost Apple approximately $10.7$ billion in lost revenue.

Discretionary Responsibility

• Discretionary responsibilities pertain to the social roles that businesses play in society beyond their economic, legal, and ethical responsibilities.

• During the Fort McMurray wildfire, oil companies provided free food and shelter, trucked in perishable foods, and evacuated over 7,000 people using company-chartered jets from private airstrips.

• These actions are voluntary, and companies are not considered unethical for not performing them, yet stakeholders increasingly expect them.

Responses to Demands for Social Responsibility

• Social responsiveness is a company's strategy to respond to stakeholders' expectations regarding social responsibility.

• A social responsibility problem occurs when company actions don't meet stakeholder expectations.

• Four strategies for responding to social responsibility problems:

  • Reactive
  • Defensive
  • Accommodative
  • Proactive

Reactive Strategy

• Employs a reactive strategy when a company does less than society expects.

• When Google discovered that the private data of 500,000 Google+ users had been wrongly shared with outside developers for three years, the issue was fixed and then referred to Google's Privacy and Data Protection office for review.
  According to a Wall Street Journal investigation, "Internal lawyers advised that Google wasn't legally required to disclose the incident to the public … [and that the lawyers] … didn't believe notifying users would give any actionable benefit … "

• CEO Pichai approved the recommendation to not reveal the improper data access to the public.

• Google shut down Google+ after the Wall Street Journal report, but appeared more interested in protecting its reputation than letting customers know about the mistake.

Defensive Strategy

• A company using a defensive strategy would admit responsibility for a problem but would do the least required to meet societal expectations.

• Amazon hasn't required new third-party sellers on its website to prove the safety of their products until recently.

• The US Environmental Protection Agency (EPA) penalized Amazon for nearly 4,000 violations dating back to 2013 "for selling and distributing imported pesticide products that were not licensed for sale in the United States."

• An Amazon spokesperson stated, "Safety is a top priority at Amazon. When a concern arises, we move quickly to protect customers and work directly with sellers, brands, and government agencies."

• Hundreds of them returned weeks later with different sellers, different product names, and different packaging.

Accommodative Strategy

• A company using an accommodative strategy will accept responsibility for a problem and take a progressive approach by doing all that could be expected to solve the problem.

• Amazon contacts US and European authorities each time it confirms the sale of a counterfeit product. 131

• Amazon has also introduced the following new programs to aggressively battle counterfeiting:

  • Brand Registry
  • Project Zero
  • Transparency
  • Intellectual Property Accelerator

Proactive Strategy

• A company using a proactive strategy will anticipate responsibility for a problem before it occurs, do more than expected to address the problem, and lead the industry in its approach.

• McDonald's has stopped selling menu items made from chickens treated with antibiotics.

• Indeed, 2 million Americans a year develop bacterial infections resistant to antibiotics, and, according to the Centers for Disease Control and Prevention (CDC), 23,000 of them will die. McDonald's made these changes even though it significantly increased

Social Responsibility and Economic Performance

• Being socially responsible usually won't make a business less profitable.

• Being socially responsible usually won't make a business less profitable.

• The costs of being socially responsible can be offset by a better product or corporate reputation, resulting in stronger sales or higher profit margins.

• Businesses enhance their reputations by being socially responsible, they hope to maximize willingness to pay, that is, customers paying more for products and services that are socially responsible.

• There is a small, positive relationship between social responsibility and economic performance that strengthens with corporate reputation.

• Even if there is generally a small positive relationship between social responsibility and economic performance that becomes stronger when a company or its products have a positive reputation for social responsibility, and even if there is no trade-off between being socially responsible and economic performance, there is no guarantee that socially responsible companies will be profitable.

• Being socially responsible might be the right thing to do, and it is usually associated with increased profits, but it doesn't guarantee business success.