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Corporate Social Responsibility And The Classical Model Of The Firm

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Corporate Social Responsibility And The Classical Model Of The Firm

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Outline the definition of corporate social responsibility favored by the classical model of the firm.

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Based on classical model of the firms, corporate social responsibility can be defined as the set of obligations, lawful and ethical commitments with stakeholders, stemming from the effects of firm’s operations and activities on labor, social, environmental and human rights fields. Valor et al 2003 further this by explaining that corporate social responsibility infers recognizing and integrating into firm’s operations by companies of environmental and social concerns. This is to say, in addition to economic criterion, it means including other criteria for example environmental and social, in managing the firms and the manner in which firms respond to communities’ needs.

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Examine critically the ethical underpinning and justification of this approach?

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According to assertions by Madariaga (2009), currently, companies rely on various stakeholders to interact with and this relationships depend on the success or failure of the company. Although some scholars defend companies as only responsible to their stakeholders, and the people responsible for company’s profitability, there remains one fact irrefutable. Various firms are making policies in the field of corporate social responsibility to boost their profitability. Kotler et al 2004 based on their survey from Fortune 500 affirm that more than ninety percent of the firms have a set CSR strategies in place. Berner 2005 also through an article published in Business week, confirmed that companies in North America have CSR. On a case study conducted, it was confirmed that General Motors spend more than five million dollars and General Mills more than sixty million dollars in CSR activities.

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There exists three fundamental institutions in current economic system among being firms, market and the state. This explains that corporate social responsibility entails other facets in addition to firm’s shareholders. It is also evident that firm’s profitability is contributed by in addition to internal factors, communal factors. The classical model of the firm therefore expounds on the definition and entails communal and operations factors as determinants of firm’s profitability. Using Smith’s well-known idea about “invisible hands”, CSR should aim at creating a balance to maximize firm’s profit through maximization of the firm’s benefits to the local community. Nevertheless, markets are imperfect on their own due to presence of various shortcomings and so the firms cannot fully meet the communities’ needs. Therefore, as confirmed by classical model of the firm’s definition of CSR, the firms should take part in improving their efficiencies, setting effective property rights systems, and supplying goods and services required by the community.

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Consider whether self-regulation is effective and sufficient for the major corporations in the light of this definition. (with reference to Olympus cameras, Ford or GM cars, Enron, Wal-mart case studies, Uniliver Code of Business Principles)

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Based on its definition, corporate social responsibility is essential to both shareholders and for the general community (Cuesta, 2004). This points to existence of different links between quality stakeholder and company’s profitability. The connections are more obvious. For instance, eco-efficiencies are enhancements in connection to improved resource managements due to corporate social responsibility.

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Based on the market behavior in the year 2008 in most stock markets, various evidence can be drawn about the existence of relationship between CSR and market value. Various firms do seek short-term profitability without caring for its long-term profitability and this has resulted to huge losses in the long-term. CSR implies controllably introducing ethical criteria in firm’s management, and also enhancing accountability and transparency in the company. The firms therefore need to be cautious and procedural in erecting their CSR. The proper enactment could reduce related risks. Additionally, Madariaga 2009 opines that corporate social responsibility may also affect corporate reputation through the introduction of ethical criteria for management. CSR could also allow companies to quote in ethical stock indexes or reduce chances along their value chain. Self-regulation is effective and sufficient for the major corporations in the light of definition of corporate social responsibility.

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Taking an example of Wal-mart Company, though it has witnessed immerse growth, there are various changes required for enhancing its self-regulation and improving its profitability. The company needs to regulate itself and spring up to improved ethical standards or for a better change. CSR has especially been problematic to the company, as Wal-Mart does not only get profits from impoverishment of its employees but also from sales to customers. Currently, based on the light of issue aforementioned, Wal-Mart’s self-regulation is effective and sufficient for its operations but adjustments are recommended.

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Are voluntary codes of ethics on corporate social responsibility effective? Pick two responses typical of business to CSR incidents and explain how and why the firms reacted as they did.

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According to Xiaoyong 2006 , the voluntary code of ethics have been essential part of efforts in enhancing right related to labor standards in international supply chains. In the past decade, the codes of conduct and system for implementation have multiplied. With the cases of BP oil spillage and Bhopal disaster, the companies UCIL Company and BP Company were faced with different codes of conduct and their suppliers get confused with different monitoring systems and standards. The Bhopal disaster caused from Bhopal plant run by UCIL Company led to thousands of deaths (Windsor C., 2010, and Bhopal, 2006).

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Taking example of TNC, the need for standard setting to control conduct of ethics in this organization gave rise to creation of code controlled by global organizations. The creation of the code of ethics has led to adoption of OECD guidelines and the ILO Tripartite Declaration.

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Corporate social responsibility is one of the main aspects of business that has recently received massive attention. Also, such companies as Toyota, Ford, and Dell among others have taken it upon themselves to improve their environmental consciousness. For example, Toyota has buildings in the USA, which the U.S. Green Buildings Council has gold certified. Dell allows customers to purchase carbon offsets with the purchase of a new computer (Lyon and Maxwell, 2008). Some concerns arise about these strategies inspired by public relations. However, employees, regulators and other stakeholders have embraced them as a way of internalizing externalities emanating from the company’s operations.

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Objectives, values, and functions enable a business to create value for the society and improve social welfare. It is directly linked to the power that an organization has in the society. Some opposition to the practice of CSR in companies has been witnessed with the view that it results in the diversion of business attention. D’Vogue suggests in the CSR Quest (2012) that CSR is not a precondition or success of a business, but a corporate strategy dimension. This increased social responsibility does not necessarily increase success. The risks of CSR are similar to those emanating from any other business strategy. Companies taking social responsibility are motivated by such factors as innovation, customer satisfaction, or financial performance, as opposed to brand success (CSR Quest, 2012).

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The Bhopal disaster enacted various reactions from the government as well as the company. According to Bhopal 2006, the owner of the company, UCIL, paid $470m to the victims to help them settle litigation stemming from the disaster. The money was as a directive issued by the government for the compensation of the victims.

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The Oil spillage from BP Company also caused different reactions from the government. The USA president held BP Company responsible for the disaster. According to Windsor 2010, the company paid amount totaling to $80 billion to cater for the victims. This amount was to take care of penalties, damaged and clean-ups.

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Ways in which corporations seek to regulate their, behavior or avoid doing, so to meet these definitions.

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There are various ways that have been enacted by BP and UCIL Companies in controlling their CSR and other internal and external operations. The methods and extents normally depend on the size, operation market and processing procedure plus the target markets of the organizations. This implies that each company based on its restrictive and unique customers have different controlling methods.

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One of the methods used by the organizations is through the market or state regulations. There are rules and regulations enacted by the ruling state to govern various businesses and their operations. All the CSR to be effected by such a company has therefore to be in according with these regulations.

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The second method is through market evaluation taking into consideration the target market, goods or services to be sold and the area of operation. Most firms depend on past information regarding their sales and customers’ response to design CSR strategies.

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Take particular note of M Friedman – the classical theory of the firm and CSR How far do the companies in your examples apply this doctrine?

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Friedman defines corporate social responsibility as the set of obligations, lawful and ethical commitments with stakeholders, stemming from the effects of firm’s operations and activities on labor, social, environmental and human rights fields. Based on this definition, firms have restrictions and limits in their operations and enactments. There are various factor that determine the extent to which a company operate. The extents are further defined by the target market and customers’ needs. The communal needs also come handy when using Friedman’s definition and explanation of companies’ requirements, and obligation to corporate social responsibility.

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On application, the two companies, BP and UCIL Companies apply Friedman’ definition of corporate social responsibility as they engage with their shareholders. Through the engagement, the companies are able to understand not only the market requirements but customer’s preferences and businesses opportunities.

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Pick two ways in which Firms try to avoid their CSR responsibilities – giving examples of Rationalizing unethical behavior

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There are various ways through which different companies tend to avoid their responsibilities as regarding CSR. Taking example of two companies, BP and UCIL Companies, they did not take proper care and caution and so the oil spillage and their disasters (Bhopal, 2006). Among the way include operation in international market and having nothing to do with local communities. The international operations have thwarted the local community from taking part in the company’s development and operations.

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The lack of proper community and shareholder engagements indicated unethical behavior by the two companies. It was observed that after the disastrous incidences, some of the shareholders in both companies withdrew their shares due to lack of proper engagements.

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The other way through which the two companies avoid taking responsibility for CSR is through outsourcing workforce from other countries or regions. Different companies comparing the labor costs have decided to employ employees from other cheaper regions and thus avoiding CSR.

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How do companies in your examples seek to handle the case/issues – and what are the consequences and for whom?

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The corporate disaster caused in BP oil spillage and Bhopal India disaster resulted to increased government regulations in both companies (BP and UCIL Company). The environmental disaster caused as a result of the two also led to environmental disasters and this raised problems for the local communities.

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The restrictions of CSR based on the above definition can be advantageous or disadvantageous depending on the concerned group. The Oil spillage of BP Company led to political and trade restrictions by the states. Taking example of a company operating in a competitive market for instance BP oil, it was beneficial to engage the local community to enhance their sales unlike dormant community. On the contrary, the community normally depends on the organizations of their livelihoods (Bhopal, 2006).

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The consequences of avoiding CSR is double-fold, can be beneficial to community or disadvantageous to either party or both. One of the consequences could be reduced community response to a company’s products. For the case of BP Company, the lack of proper CSR strategies led to reduced investments from the local and international. The other consequence could be thwarted operations of the company due to communal needs. This could prevent the growth of the company and thus limiting its production.

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The idea of social corporate social responsibility as brought forward by proponents of free market is fallacious as the main goal of business enterprises is to make profits; this is because the interests of business owners and those of the community are different and divergent from each other. For instance, it is widely believed that apart from participating in the normal duty of making profits for the owners, business should also strive to provide employment to the people and participate in conserving the environment. The big challenge lies in whether the business should sacrifice their profits to perform activities that are considered as part of their corporate social responsibility.

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Set out the problems with the utilitarian Friedman approach in the cases you use. Who gets the benefits and who get the pain? Qui bono?

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The Friedman’s approach to CSR is beneficial to the community and not beneficial to the organization. The definition restricts and requires the organization to have active roles in helping and promoting the social beings of the societies in which they operate.

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Although the semantics on CSR may differ, it almost universally accepted that CSR has an impact on customer loyalty. This is so since more and more customers are increasingly buying products produced in a socially and environmentally acceptable way (Lai, 2006). However the effects of CSR on customer loyalty have continually proven difficult to quantify – depending on how an organisation handles CSR activities, their impact may either be positive or negative.

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Countless studies have been done on the effects of community support related CSR activities on customer response to a company’s products and services. Vavra (1994), for instance argues that customer satisfaction is an important aspect in all successful business organisations. As stipulated by Mandhachitara and Poolthong (2011), community support comprises of all activities falling within the following facets: donation to charities, help to disadvantaged, disaster relief, anti-drug campaigns, and education scholarships. In the current corporate environment, the success of an organisation is dependent on its relationship with key stakeholders who include customers and their level of satisfaction (Vavra, 1994). According to Li (2009), customers are more likely to offer support to businesses that engage in community based initiatives such as donating to charity and sponsoring anti-drugs campaigns. Overall and as Arli and Lasmono (2009) posit, community support related activities play two important roles in creating customer loyalty – they improve the attitude of the customer towards the company and reduce any negative customer concerns the customers might have towards a product.

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References

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Arli, D & Lasmono, H, 2009, ‘Consumer’s Perception of Corporate Social Responsibility in a Developing Country’, in , presented at Society for Business Ethics, Annual Meeting, Chicago, USA, 6-9 August, 2009

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Bhopal, 2006. Bhopal Gas Tragedy Information. Retrived from http://www.bhopal.com/ on 1st, March, 2015.

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Lyon, TP & Maxwell, JW 2008, Corporate social responsibility and the environment: A theoretical perspective, Review of Environmental Economics and Policy, 1 (0), 1-22.

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CSR Quest 2012, CR theoretical background. Available at <http://www.csrquest.net/default.aspx?articleID=13126&heading=> [Accessed February 23, 2015].

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Lai, Q. (2006) Corporate social responsibility of SMEs in China: Challenges and outlooks, Nexen.

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Li, J. Y. (2005) Investing in China the Emerging Venture Capital Industry, London, Blue Ibex Ltd.

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Madariaga, J. (2009). Corporate social responsibility and the classical theory of the firm: Are both theories irreconcilable?

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Vavra, T.G. (1994) ‘Emphasizing market share disregards current customers’, Marketing News, 28(10), 11.

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Windsor C., 2010. The BP Gulf Oil Spill: Public and Corporate Governance Failures. Monash University, Clayton 3800.

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Xiaoyong, H., 2006 . Corporate Codes of Conduct and Labour-related Corporate Social Responsibility. The Japan Institute for Labour Policy and Training.

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