The Role of Business in

Society
Prof Ashish K Mitra

Role played by Businesses in the

society
Employing People
Source of income
Source of satisfaction & achievement

Providing goods and services

choices to people as customers
technical advancements & innovation leading to lower
cost, improved quality, convenience etc

Social platform / role for individuals

Place to meet / interact outside family ; a sense of
community
condition of well being, bykeep oneself busy, and
business is one major outlet for this basic human need

Role played by Businesses in the society

(contd)

Basis of nations economy

Help build strong economy
Business success effects entire society
Creates increased economic activity &
wealth

Spawns entrepreneurship
Aspiration for own business
Sense of independence & control
Achieve success & wealth

Pay Taxes to Government

Focus of business on creating wealth

In the simplest language the role of business is to
create wealth.
The word "wealth" comes from two old English words "weal" and "th" meaning "the condition of well being"
or as Robert Kennedy put it "the things that make life
worth living".
While the role of business has always been the same,
to build and maintain the condition of well being,
sadly, largely motivated by greed, the shorthand for
well being has gravitated to profit or financial gains
Over time, society's views and perceptions of
business's license to operate has changed. Business or more particularly business leaders - have been seen
to be out of sync with public expectations around
this condition of well being.

Need for creation of social wealth

(well being)
Business depends on Society for the needed
inputs like People, Skills , money etc
Business also dependent on Society for markets
where its products / services may be sold
Thus business depends on society for
sustenance, growth and encouragement. If
society dies, business goes down with it.
Business needs a congenial environment from
society.
Being so dependent business has definite
responsibility towards society.

Need for creation of social wealth(cont)

Responsibility of Business must include obligation
of business enterprises to make decisions and
follow line of action, which are desirable in terms
of the objectives, expectations and values of the
society.
Social responsibility is thus an obligation of
decision makers to take actions which
protect and improve the welfare of society as
a whole along with their own interest.
Business decisions may affect environment,
employees, customers, community etc
Companies need customers who can afford their
products, which means that businesses benefit
from social stability and broad prosperity.

Need for creation of social wealth

(cont)
Businesses also need physical infrastructure like
roads , ports
social infrastructure like good schools, safe
neighborhoods, and effective legal systems.
Businesses that ignore the broader social and
environmental context in which they operate are
likely to pay a price: reputational damage and
loss of brand value, falling sales, difficulties in
recruiting talent, lower worker productivity,
corruption, tougher government regulation, or an
increase in climate-change-related costs.

Changing view of Role & social

responsibilities of business
Adam Smith, an 18th century economist and author
ofThe Wealth of Nations, wrote individuals pursuing
their own best self-interest would result in the greatest
overall good to society, and that levels and kinds of
goods and services in the market should be determined
by the free market alone (i.e., not by government)

Given sufficient motivation for personal gain,

each person would work hard, and as a result,
society as a whole would benefit with more jobs,
more competition, and better quality goods and
services.
Smith acknowledged the concept ofexternalitiesand other
free market breakdowns, but didnt really address them as a
major challenge to society.

Nobel Laureate Milton Friedman in 1970 said

 Single-minded focus on profit

maximization is what led to the
creation of bundled mortgage
backed securities that led to the
housing bubble, that virtually melted
down the global economy in 2008.

Friedmans views..

The Friedman view assumes that

competent, corrupt ion free governments
would provide the public goods necessary
for a prosperous economy ; and contain the
negative fall outs like pollution and climate
change, that result from private economic
activities.
But, in the actual governments are often
unable or unwilling to provide required
public goods or curb negative externalities.
In response to government failures,
companies face pressure from a variety of
stakeholders including incompetent and
corrupt governments themselves to

The Pyramid of Social Responsibilities

Archie B Carroll (1991)brought out the four
dimensions of responsibility of Business : Economic,
Legal, Ethical , and Voluntary ( including philanthropy).
Economic responsibilities: being basically an economic
entity, the primary responsibility is economic, i.e.
produce goods that society needs & sell them at profit.
Legal responsibilities are also basic, must operate
within laws of land.
Ethical responsibilities refers to behavior by the firm
that is expected by the society but not codified in a
law. e.g. till passage of foreign corrupt practices act in
1977 it was not illegal in USA to bribe foreign officials.
But there was public indignation to such practice.

The Pyramid of Social Responsibilities

(contd)
Voluntary / discretionary responsibility like
providing philanthropic contribution to an
educational institute . Few people expect
corporations to fulfil ldiscretionary
responsibilities, but all expect a firm to satisfy
ethical responsibilities.
However, ethical and voluntary together
constitute social responsibilities of a business.
Laws always lag expectations of society.(day
care , equal rights)

 whether businesses are for society or for

the shareholders alone.
It becomes very clear from his logic that
businesses, whatever be their size, are
meant for society and the shareholders are
trustees for the business.
Only when we start looking at business
from this perspective would we have a
society which is functioning smoothly and
growing collectively.

Three approaches to address societal

interests beyond wealth creation
There are three major approaches / concepts that
emerged over past several decades having a similar
focus in protecting various interests. These are:
Corporate Social Responsibilities : refers to a
corporations responsibilities or obligations toward society
and has its origin in USA , to protect and improve

the welfare of society as a whole (besides businesss

own interest). Business should promote public good,
and to contribute to societys stability, strength and
harmony. Focus of CSR is more on policies and
actions of Business, for well being of society.

 Business Ethics : Highlighted social values and

societys concerns in the 1970s and forced corporations
in USA to abstain from actions which violated consumer
protection and environment protection etc. and provide
safeguards in business practices so that they are fair
and respect rights of different stake-holders. Here the
focus is on more on people, how individuals ( like
managers, Sales persons) running business should
conduct in fulfilling the ethical requirements of business.
Corporate Governance : commenced in UK in 1990s
for improved accountability of the board of directors to
shareholders, more transparent auditing, increased
responsibilities of independent directors, and division of
role of chairman and chief executive etc, for safe
guarding interest of minority shareholders.

 Harvard Business School provided an

endowment of US $30 million in 1987 to focus
on the interest on teaching business ethics to
management students.
In the wake of mounting scandals,
corporations all over the world are adopting
code of Ethics , business management schools
are developing ethics courses and consultants
are hired to infuse integrity into corporate
culture.
CG is more at strategic management level; BE
more at Operational management level , all over
business activities ??

 Stakeholders theory: Two scholars,

Edward Freeman and David Reed, pioneered
this view. Any identifiable group or
individual who can affect the achievement
of an organizations objectives or who is
affected by the achievement of an
organizations objectives is a stakeholder.
In other words, a stakeholder has a
stake in the company. A company should
be run for the benefit of all stakeholders.

Corporate Governance
Definitions

The way in which organizations are directed and

controlled
Cadbury
(1992)

The process by which corporations are made

responsive to the rights and wishes of
stakeholders
Demb and Neubauer
(1992)

Four Pillars of Corporate

Governance
Accountabilit
y
Fairness
Transparenc
y
Independenc
e

Accountability
Ensure that Management is
accountable to the Board
Ensure that the Board is accountable
to Shareholders & other
stakeholders.
Ensure that all Stakeholders are
accountable to Society

Fairness
Protect Shareholders rights
Treat all shareholders including minorities,
equitably
Provide effective redress for violations
Strike a judicious balance between its
Corporations own interest and the interest
of various stakeholders.

Transparency
Ensure timely, accurate disclosure on all
material matters, including the financial
situation, performance, ownership and
corporate governance
(crony capitalism, fraud down)

Independence
Procedures and structures are in place so
as to minimize, or avoid completely
conflicts of interest, system of checks &
balances
Independent Directors and Advisers i.e.
free from the influence of others

 Arecent studyfound that patient shareholders

account for a larger portion of the shares of
companies that espouse a long-term
sustainability agenda relative to companies
committed to share-price maximization.
A growing numberof investors are looking for
responsible investment orimpact investment
opportunities that promise a mix of both
financial and social returns.
Every company both depends on and affects
the societies in which it functions. The larger
and more global the company, the larger and
more global are its societal effects.

 Apples brand was shaken few years back by

revelations about brutal workplace conditions at
Foxconn factories in China, where most of its
iPhones and iPads are assembled
Reputational of Global apparel brands damage
caused by lethal working conditions in
Bangladeshi garment factories.
There are nowmobile phone apps that assess
and gradelarge multinational companies supply
chains for customers, investors, and public
officials. Scoring poorly risk losing sales and
investors and triggering official regulatory or
legal action

Corporate Social Responsibilities

Some arguments For Business taking up more & more

Societal responsibilities
Against taking up more & more
Societal responsibilities

Arguments For and Against Social

Responsibility
Arguments For Social Responsibility

Arguments Against Social Responsibility

1. Business creates problems and

should therefore help solve them.

1. Business lacks the expertise to

manage social programs.

2. Corporations are citizens in our

society.

2. Involvement in social programs

gives business too much power.

Social
Responsibility

3. Business often has the resources

necessary to solve problems.

3. There is potential for conflicts

of interest.

4. Business is a partner in our

society, along with the government and the general population.

4. The purpose of business in U.S.

society is to generate profit
for owners. Some believe Social
resp is Govts job

Approaches to Social
Responsibility
Degree of Social Responsibility
Obstructionist
stance
Lowest

Defensive
stance

Accommodative
stance

Proactive
stance
Highest

Approaches to Social
Responsibility (contd)
Obstructionist Stance (Unconcerned)
Do as little as possible to solve social or
environmental problems.

Defensive Stance (Damage Control)

Do only what is legally required and nothing more.

Accommodative Stance (Compliance)

Meet legal and ethical obligations and go beyond that
in selected cases.

Proactive Stance (Ethical Culture)

Organization views itself as a citizen and proactively
seeks opportunities to contribute to society.

The CSR Debate moves

on
The early message doing well by doing good
CSR imposes political functions of govt on corporate executives
CSR has failed to create the good society expecting too much
from business
Close adherence to CSR agenda leads to falling profits
Difficulty in allocating rights responsibilities and enforcing them
who decides?
Stakeholder theory the way forward CA through building
superior relationships.
Good CSR manages the paradox of profitability & responsibility
SUSTAINABILITY has become a major added agenda
for CSR today

Jury is still out you decide!

Civil societys perception

S Gopalakrishnan, ex- CEO and MD of Infosys

Technologies
Business is supposed to do good to society but we see
more and more evidence that sometimes it does harm.
The business environment leads to concentration of
wealth in very few hands, which adds to the disparity in
society and which is the root of other problems.
In a country of 1.2 billion people, it is the top 1% or 2%
that calls the shots. This is a radical statement coming
from the head of a respected, internationally well known
and successful company right here in Bangalore.