6.1 Introduction
- A business enterprise should operate and earn money in ways that fulfill society’s expectations.
- Society permits business enterprises to carry on industrial or commercial activities and earn profits.
- It is obligatory for businesses not to engage in socially undesirable practices, even if they increase profit. Examples of undesirable practices include manufacturing/selling adulterated goods, deceptive advertisements, not paying taxes, polluting the environment, and exploiting workers.
- Socially desirable practices, such as supplying good quality goods, creating healthy working conditions, paying taxes honestly, installing pollution devices, and addressing customer complaints, improve an enterprise’s image and profitability.
- Durable success for business enterprises is achieved through socially responsible and ethically upright behavior.
6.2 Concept of Social Responsibility
- Social responsibility of business refers to its obligation to make decisions and perform actions that are desirable in terms of societal objectives and values.
- Assuming social responsibilities means businesses respect societal aspirations and contribute to their achievement alongside profit interests.
- This concept contrasts with the notion that business solely exists for maximizing owner profits.
- Social responsibility is broader than legal responsibility. Legal responsibility is met by mere compliance with law, while social responsibility involves a firm’s recognition of obligations not covered by law, in addition to legal obligations.
- It includes a voluntary element of action for the benefit of society by business people.
6.3 Need for Social Responsibility
- The concept of social responsibility is an ethical issue, involving what is morally right or wrong regarding a firm’s responsibilities.
- There has been a debate on whether business should assume social responsibilities. Some believe a firm’s only social responsibility is to its owners, while others argue it has a social responsibility to serve all sections of society affected by its decisions.
Corporate Social Responsibility (CSR)
- Corporate sustainability involves a balanced approach to economic, social, and environmental protection, meeting sustainable development goals.
- There is no single universally accepted definition of CSR, but all definitions highlight the impact businesses have on society and societal expectations of them.
- European Commission: Defines CSR as “the responsibility of enterprises for their impacts on society”.
- World Business Council for Sustainable Development: Defines CSR 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”.
- In India, CSR is governed by Clause 135 of the Companies Act, 2013.
- Applicability: Companies with an annual turnover of ₹1,000 crore or more, a net worth of ₹500 crore or more, or a net profit of ₹5 crore or more.
- Rules (from fiscal year 2014-15):
- Companies must set up a CSR committee including at least one independent director.
- Companies are encouraged to spend at least 2% of their average net profit from the previous three years on CSR activities.
- Indicative activities are specified under Schedule VII of the Act.
- Only CSR activities undertaken in India are considered.
- Activities exclusively for employees and their families do not qualify as CSR.
6.3.1 Arguments for Social Responsibility
- (i) Justification for existence and growth: Business exists to satisfy human needs, and its prosperity depends on continuous service to society.
- (ii) Long-term interest of the firm: A firm gains maximum long-term profits by serving society. Public image improves with support for social goals. Withdrawal of cooperation from stakeholders can occur if business does not serve their interests.
- (iii) Avoidance of government regulation: Voluntary assumption of social responsibilities can reduce the need for new laws and government interference, which businesses find undesirable.
- (iv) Maintenance of society: Laws cannot cover all circumstances. Businesses should assume social responsibilities to prevent anti-social activities that harm business interests.
- (v) Availability of resources with business: Businesses possess valuable financial and human resources, including managerial talent and capital, that can be used to solve societal problems.
- (vi) Converting problems into opportunities: Businesses, known for turning risky situations into profitable deals, can solve social problems and make them useful by accepting the challenge.
- (vii) Better environment for doing business: A society with fewer problems provides a better environment for businesses to operate successfully.
- (viii) Holding business responsible for social problems: Some social problems (e.g., environmental pollution, unsafe workplaces, corruption) are caused or perpetuated by businesses, making it their moral obligation to help solve them.
6.3.2 Arguments against Social Responsibility
- (i) Violation of profit maximisation objective: Business’s primary existence is for profit maximisation, and social responsibility goes against this objective. Businesses best fulfill their social responsibility by maximizing profits through increased efficiency and reduced costs.
- (ii) Burden on consumers: Social responsibilities like pollution control are costly, and businesses may shift this burden to consumers through higher prices.
- (iii) Lack of social skills: Businessmen lack the necessary understanding and training to solve social problems, which should be handled by specialized agencies.
- (iv) Lack of broad public support: The public generally does not favor business involvement in social programs, leading to a lack of public confidence and cooperation.
6.3.3 Reality of Social Responsibility
- Business people increasingly realize they have social obligations beyond profit-making.
- This realization is partly due to the need for private enterprises to survive in a democratic society where people demand responsible conduct.
- Factors influencing businesses to consider social responsibilities:
- (i) Threat of public regulation: Governments act as welfare states, and socially irresponsible businesses face regulation to protect public interest.
- (ii) Pressure of labour movement: Educated and organized labor movements have forced businesses to consider worker welfare, moving away from “hire and fire” policies.
- (iii) Impact of consumer consciousness: Education, mass media, and competition have made consumers aware of their rights and power, shifting from “caveat emptor” to “customer is king”. Businesses are now customer-oriented.
- (iv) Development of social standard for business: Businesses are no longer seen as merely profit-driven entities but are expected to serve social needs. Society permits business to exist and grow, and its functioning is judged by social standards.
- (v) Development of business education: Business education, with its focus on social responsibility, has made individuals (consumers, investors, employees, owners) more sensitive to social issues.
- (vi) Relationship between social interest and business interest: Businesses are realizing that social and business interests are complementary. Long-term benefits are achieved by serving society well.
- (vii) Development of professional, managerial class: Professional managers, trained in management education, have a different attitude towards social responsibility than owner-managers. They are interested in satisfying various interest groups for successful enterprise operation, not just profit goals.
- Business is now a socio-economic activity, an economic institution that must reconcile its economic interests with societal demands.
6.4 Kinds of Social Responsibility
Social responsibility can be divided into four categories:
- (a) Economic responsibility: Primary responsibility to produce desired goods and services and sell them at a profit. There is little discretion in performing this.
- (b) Legal responsibility: Operate within the laws of the land, as laws are for societal good. A law-abiding enterprise is socially responsible.
- (c) Ethical responsibility: Behavior of the firm expected by society but not codified in law (e.g., respecting religious sentiments in advertising). Involves an element of voluntary action.
- (d) Discretionary responsibility: Purely voluntary obligations (e.g., charitable contributions, helping during disasters). Management is also responsible for safeguarding capital investment by undertaking healthy business ventures.
6.5 Social Responsibility Towards Different Interest Groups
Businesses must decide which areas to focus on for social goals. Specific responsibilities include:
- (i) Responsibility towards the shareholders or owners: Provide a fair return on investment, ensure investment safety, and provide regular, accurate, and full information about operations and future growth.
- (ii) Responsibility towards the workers: Provide opportunities for meaningful work, create good working conditions, respect democratic rights to form unions, and ensure fair wages and treatment.
- (iii) Responsibility towards the consumers: Supply right quality and quantity of goods and services at reasonable prices. Take precautions against adulteration, poor quality, lack of service, misleading advertising. Consumers have a right to information about products and the company.
- (iv) Responsibility towards the government and community: Respect laws, pay taxes regularly and honestly. Act as a good citizen, adhere to societal values, protect the natural environment (avoid pollution, ugly buildings, dirty conditions), and develop a proper public image.
6.6 Business and Environmental Protection
- Environmental protection is a serious issue for business managers.
- Environment definition: Totality of man’s surroundings, both natural (land, water, air, fauna, flora, raw materials) and man-made (cultural heritage, socio-economic institutions, people).
- Quality of the environment is deteriorating due to industrial activity, especially around major cities, affecting people’s health.
- Pollution: Injection of harmful substances into the environment, largely a result of industrial production. Manufacturers face the challenge of minimizing waste’s adverse impact using proper technologies.
- Pollution changes physical, chemical, and biological characteristics of air, land, and water, harming life and degrading living conditions while depleting raw materials. Cultural heritage is also affected.
- Pollution occurs when the environment’s assimilation capacity is exceeded. Hazardous pollutants (toxic by-products, chemicals) cannot be assimilated.
- Pollution creates risks to environmental quality, human health, and natural/man-made resources. Environmental protection is linked to pollution control.
Environmental Problems (Identified by United Nations):
- Ozone depletion
- Global warming
- Solid and hazardous wastes
- Water pollution
- Freshwater quality and quantity
- Deforestation
- Land degradation
- Danger to biological diversity
6.6.1 Causes of Pollution
- All sectors (industry, government, agriculture, mining, energy, transportation, construction, consumers) generate waste.
- Wastes contain pollutants (discarded materials/chemicals from production or consumption).
- Pollution is caused when these pollutants are released beyond the environment’s assimilation capacity.
- Industry is a major generator of waste in quantity and toxicity.
- Business activities (production, distribution, transport, storage, consumption) are critical sources of pollution.
- Types of pollution caused by businesses:
- (i) Air pollution: Lowered air quality due to factors like carbon monoxide from automobiles and smoke/chemicals from manufacturing plants. Leads to ozone layer depletion and global warming.
- (ii) Water pollution: Primarily from chemical and waste dumping into rivers, streams, and lakes, threatening human and animal life.
- (iii) Land pollution: Caused by dumping toxic wastes on land, damaging its quality and making it unfit for agriculture/plantation. Restoring damaged land is a significant problem.
- (iv) Noise pollution: Caused by factories and vehicles, a health hazard leading to hearing loss, heart malfunctions, and mental disorders.
6.6.2 Need for Pollution Control
- Pollution prevention/control preserves environmental resources and improves environmental quality for human benefit and well-being.
- Pollutants alter environment quality, making it unfit for normal life.
- Businesses need to take measures not only to avoid criticism but also for other benefits.
- Reasons for pollution control:
- (i) Reduction of health hazards: Many diseases are caused by environmental pollutants. Control measures can reduce seriousness and support healthy life.
- (ii) Reduced risk of liability: Enterprises can be held liable to pay compensation for harm caused by toxic wastes. Installing pollution control devices reduces this risk.
- (iii) Cost savings: Effective pollution control saves business operating costs. Improper production technology leading to greater wastes increases disposal and cleaning costs.
- (iv) Improved public image: Policies and practices for waste control influence public attitude. A firm promoting environmental causes gains good reputation and is seen as socially responsible.
- (v) Other social benefits: Pollution control leads to clearer visibility, cleaner buildings, better quality of life, and purer natural products.
6.6.3 Role of Business in Environmental Protection
- Protecting the environment is a collective responsibility.
- Business enterprises should lead in finding solutions to environmental problems.
- It is the social responsibility of every business to check pollution and protect environmental resources.
- Businesses, as creators of wealth, employment, trade, and technology, possess significant resources (financial, physical, human) and know-how to solve pollution problems with a preventive approach.
- Modifying production processes, redesigning equipment, substituting materials, or innovative approaches can reduce or eliminate pollution.
- Specific steps businesses can take:
- (i) Top management commitment: Strong commitment to creating, maintaining, and developing a work culture for environmental protection.
- (ii) Enterprise-wide commitment: Ensure commitment to environmental protection is shared by all divisions and employees.
- (iii) Clear policies and programmes: Develop policies for purchasing quality raw materials, employing superior technology, scientific waste disposal/treatment, and employee skill development for pollution control.
- (iv) Compliance with laws and regulations: Adhere to government-enacted pollution prevention laws.
- (v) Participation in government programmes: Engage in initiatives like hazardous substance management, river cleanup, tree plantation, and checking deforestation.
- (vi) Periodical assessment: Regularly assess pollution control programs based on costs and benefits to increase progress.
- (vii) Educational workshops and training: Arrange these to share technical information and experience with suppliers, dealers, and customers to involve them in pollution control.
Environmental Protection in India (Steps by the Government)
- 1. Laws: Directive principles in the Constitution emphasize environment protection. Laws include:
- The Wildlife Protection Act, 1972
- The Water (Prevention and Control of Pollution) Act, 1974 (amended 1974, 1988)
- The Air (Prevention and Control of Pollution) Act, 1974 (amended 1974, 1988)
- The Environment (Protection) Act, 1986
- The Forests (Conservation) Act, 1980 (amended 1988)
- The Hazardous Wastes Act, 1989
- 2. Regulations: Administrative orders/policy guidelines established. Department of Environment, Government of India, created in 1980.
- 3. Regulatory bodies/quasi-judicial authorities: Established bodies like the National Afforestation and Eco-development Board and National Wastelands Development Board.
- 4. Manufacturing unit closures/shifting: Units closed or shifted from cities by court orders (e.g., Delhi, Agra, Kanpur).
- 5. Programmes and seminars: Regular organization of environment education programs and awareness seminars.
- 6. Environment Action Plan (EAP): Government has laid down an EAP.
6.7 Business Ethics
- From a social perspective, business supplies goods and services. From an individual perspective, the primary objective is profit.
- Business decisions and actions may not always align with societal expectations (e.g., good economic performance but poor social performance).
- The question of what is right or wrong from society’s perspective is important, as businesses are influenced by and must adjust to societal values.
- Ethics links individual good and social good.
6.7.1 Concept of Business Ethics
- Ethics origin: From the Greek word “ethics” meaning character, norms, ideals, or morals in a group/society.
- Ethics definition: Concerned with right and wrong in human behavior judged by a standard form of conduct approved by society in a specific activity. It refers to moral values society attaches to human actions, and codes for controlling means to serve human ends.
- Ethical standards are often codified into laws, but ethical behavior goes beyond observing laws and regulations. It means adhering to moral principles, being guided by values, and acting as people ought to.
- Business ethics: Concerns the relationship between business objectives, practices, techniques, and the good of society. It refers to socially determined moral principles that should govern business activities.
- Examples of business ethics: Charging fair prices, using fair weights, fair treatment of workers, earning reasonable profits.
- A businessperson acts ethically when their actions are upright and serve society’s interests.
- Businesspersons and politicians are expected to have higher ethical standards due to their widespread control over societal resources and decision-making on behalf of society.
- Ethics is vitally important for business and societal progress.
- Ethical business behavior improves public image, earns confidence/trust, and leads to greater success. Ethics and profits go together in the long run.
- An ethically responsible enterprise develops a caring culture for people and the environment, and commands high integrity. Ethical activity enhances quality of life and work.
6.7.2 Elements of Business Ethics
To foster ethics in day-to-day working:
- (i) Top management commitment: Crucial role in guiding ethical behavior. CEO and higher managers must be openly and strongly committed and provide continuous leadership.
- (ii) Publication of a ‘Code’: Enterprises with effective ethics programs define principles of conduct in written documents (codes). These generally cover areas like honesty, law adherence, product safety/quality, workplace health/safety, conflicts of interest, employment practices, fair selling/marketing, and financial reporting.
- (iii) Establishment of compliance mechanisms: Mechanisms to ensure decisions/actions comply with ethical standards. Examples: attention to values in recruiting/hiring, emphasizing ethics in training, regular performance auditing for compliance, communication systems for reporting unethical behavior.
- (iv) Involving employees at all levels: Employees implement ethics policies, making their involvement essential. Small groups can discuss ethics policies and employee attitudes.
- (v) Measuring results: Firms can audit to monitor compliance with ethical standards, and top management/employees should discuss results for further action.
Ground Rules of Ethics (Universal Virtues)
- Be trustworthy
- Have respect for others
- Own responsibility
- Be fair in dealings
- Be caring towards the well-being of others
- Prove to be a good citizen (through civil virtues and duties)