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The Role of Corporations

The Role of Corporations

Introduction

One of the questions that come in mind when dealing with corporations, is what they do and how they do it. The answers to these two questions may have been considered as easy and straight forward in that, the main objective of a corporation will be to increase profits. With this being what they do, corporations will then work towards organizing and governing themselves in a way that would “maximize the share value that supposedly represents the present value sum of expected future profits” (Aoki, 2010 p. 1). This role has however over the past few years evolved considering the fact that economic catastrophes such as the recent 2008-2009 depression have brought a new perspective regarding the role of corporations in the society. The effects of these events are still affecting the society and the shockwaves are still profound.

The term Corporate Social Responsibility (CSR) has being coined up as one of the means of ensuring “transparency, accountability, risk assessment and avoidance and protecting the public good” (Mullerat, 2009). CSR is now becoming the backbone in which the betterment of the society and the business at large are taken care of. The use of the term CSR supersedes the use of the term “social” in that it demands a more integral value. Mullerat argues that when this term is used, it emphasizes that a corporation should embrace the “inevitable relationship between the corporate governance, corporate responsibility to shareholders, the value chain and the community” (1). This is in direct contrast with the reasoning that was predominant in previous years when it was argued that only humans can be socially responsible and that the role of a business would only be “to make as much money as possible while conforming to the basic roles of the society” (Chadwick and Schroeder, 2002 p. 57).

Sustaining a Corporation

The last quarter of the century has witnessed an unprecedented growth in corporate entities which has been coupled by a demand for application of ethics and social responsibilities among corporation. This has acted to shift the thinking of ethical issues and the redefined the role of corporations in the society. This has in turn opened up new opportunities for companies to conform to ethical requirements so as to benefit the society. As corporations try to strike a balance between achieving their main objectives and being socially responsible in a society, the fact of the matter is that they will be exposed to a number of challenges some of which may derail them or bring them down all together.

Any corporation will first of all try to stay afloat in the increasing competitive environment. Corporations will then strive to maximize the value of shareholders which is the main objective as to why they were created. Another challenge that a corporation may face is building up an enterprise that will stand the test of time and not only survive but also be successful in the long term. As the world becomes more and more sophisticated, businesses find it harder to fundamentally survive and this poses greater challenges for the already existing and upcoming enterprises. This means that most businesses will engage in aggressive competition with each other and may prefer gaining short term performance activities where they ensure their survival for today than risking activities that they are not sure will guarantee a tomorrow.

Most of the challenges that face corporations today tend to divert their long term roles in a society in that they will mostly strive to attain “superior short-term results” in that they will tend to sacrifice investing for tomorrow and concentrate on reaping today (Mullerat, 2009). Many companies are thus faced with the headache of finding the balance between achieving long term and short term goals. Since the future, as most companies view it is uncertain, most of their investments should strive to direct their decisions towards taking risks which requires capital and careful calculation so as to increase the probability of success.

 The theoretical part of taking risks is that the more risky the investments (in that a lot of capital is injected), the greater the returns will be in the long term. However, most corporations may view injecting a large sum of capital in a different way since it means that current returns will be lowered. Although focusing on maximizing short-term returns may be admirable to shareholders, it only acts as catalyst to the inevitable demise of a corporation that adapts this philosophy. A corporation therefore has the practical role of finding the right balance between quenching short-term thirsts of shareholder without necessary sacrificing the long term potential that a corporation may have. It has been argued that for a company to be successful in the long term, it must strive to have responsibility not only to the shareholders but also to the community.

It is conventional wisdom that corporations that provide superior services to their customers have higher probabilities of succeeding both in the short and long term. Most corporations usually have people serving their customers. The workforce that a company employs, act as the basis to which the corporation owes it success to and therefore they can be considered as the greatest asset that a company can invest in. A company’s success may usually be pegged on how well it treats and motivates it workforce and this may act as the difference between “a good and great company” (Mullerat, 2009). The workforce in a corporation is tasked with producing results and coming up with innovative ideas and therefore the corporation has the role of providing them with opportunities and motivating them to develop and gain satisfaction in what they do.

A company knows very well that it cannot exist by itself and thus needs the society. It is with this thinking that a corporation should have the community in their minds when making decisions. The issue of the place of business in the society has attracted passionate debates with both sides of the divide fanatical asserting their positions. However, the gravitation to such debates has shifted within the last few years especially considering the challenges that the world has been facing such as the recent recession which nearly brought the world economy to its knees. Companies that have been emerging in recent times are slowly integrating themselves into the community and as some argue, they are now becoming “a living part of the community” (Mullerat, 2009).

Philosophers and economists argue that the long term success of a company will be pegged on how well they use their skills in engaging with and the investments that they stimulate into the community. One of the reasoning behind this thinking is that when a company engages the community, a reputation is build and this may take years to build and it acts as a backbone for the success of a business. A community as Mullerat argues, has power in that when it speaks the government will listen and it can thus decide the fate of a company whether in terms of success or failure (2009).

However, there is an extent to which a company may invest and engage in social responsibility in a community. It should not escape our attention that money spent on a community is an investment and in business terms the term investment means that there has to be returns. Corporations are therefore required to justify such types of investments to the shareholders who own the companies. If the investments are thereby overstretched, shareholders will tend to air their discontent and the corporation may tend to go on a down surge even though the investments on the community may be done in good faith. In deciding the type of investments an enterprise may inject in a community, close scrutiny is required by the company to ensure that the activities are geared towards propelling both the company and community forward. This means that a company will have to analytically think of the activities that they engage in “the doctrine of social responsibility” (Mullerat, 2009)

Corporations have the role of focusing on the long term growth of the enterprise and avoid falling into the trap of overproducing for short term benefits while sacrificing a potential tomorrow. Schminke argues that “a company is a community that is interdependent with other communities” (1998). This means that a company should take characteristics that other communities have and try to influence them. This as the authors argue will result in the company not being self centered, but also engaging the community in the pursuit of advancing.

Corporate Social Responsibility

The term social responsibility has been one that has come under close scrutiny in the corporate field. Milton Friedman, who was an economist and vocal critic of the term, argues that the term responsibility is a misconception and that only humans can be regarded as having responsibilities. Although Friedman was a respected economist he does not provide his arguments with vigor and even though his arguments may make some sense, they do not over weigh the essence of the business having some kind of responsibility.

 Friedman in his article argues that when the essence of the term social responsibility comes into the picture, it is usually at the expense of employees and shareholders. This perceptive may hold some weight considering the fact that “economic returns” and “social returns”, will tend to be at odds with each other (Mullerat, 2009). However, there are a number of companies that have been documented in the Business Enterprise Trust that have been positively engaging in social responsibilities, and at the same time enjoying profits. One such company is the 3-M which has saved in excess of $300M in their social programs of 3-P aimed at eradicating pollution. The company’s activities were not legislative but they saw it as necessary to sustain the environment both for the communities benefit and also for their economical value (Schminke, 1998).

Even though Friedman ardently criticized the use of the term “social responsibilities in corporations” he confides that it is in the “long-run interest” of a corporation to “devote resources to providing amenities” to the society or other activities that may ensure the progress of the community (Mullerat, 2009). Some of the benefits that a corporation may enjoy when it engages itself in social responsibility actions are; attracting desirable employees that are highly qualified and this will have the impact of ensuring that the company is adequately staffed. Other ways in which an enterprise may benefit is by reduction of wage bill and also reduction of losses from “pilferage and sabotage or other worthwhile effects” (Schminke, 1998).

Ethical Decision Making

The process of making ethical decisions that are morally acceptable in the society requires careful scrutiny and analysis. Making ethical decision is considered to be dependent on a number of various factors. One of the fundamental factors that any corporation will have in mind is ensuring that the decisions they make have “competing values” (Schminke, 1998). This ensures that they go in tandem with the main objectives of an enterprise which is to maximize the value of shareholders. Schminke argues that many ethical situations may tend to reflect unclear decision processes in that individuals may find the decision making “process to be ambiguous”. He argues that many ethical dilemmas are naturally secretive and thus they are not totally understood. Another reason as to why he claims that the decisions are ambiguous is the fact that there is no any “ethical decision model” that is universally accepted as an exemplar (Schminke, 1998 p. 208).

In choosing the right ethical decisions, managers should strive to set realistic objectives. An example of an unrealistic target would be that of a manager setting a sales target of 30 % for an employee to achieve while in the real sense only a merely 20% is achievable. The employee on the other hand may engage in unethical behaviors in order to achieve the target and it may be worse if there are no “clearly established and communicated ethical norms” (Carroll and Buchholtz, 2008 327).

The process of making ethical decisions usually takes the centre stage in the management process. The management engages itself in stating the problems, analyzing them and identifying various courses of actions and choosing the right one. Most of the decisions that managers will make will have “ethical implications or consequences”. Carroll and Buchholtz argue that when the issue of ethics comes into the limelight such as the implications of a production method, then the decisions taken tend to increase their level of complexity and “many carry with them an ethical dimension” (327). The two authors argue that ethical decision making, is not a simple process but rather a “multifaceted process that is complicated by multiple alternatives mixed outcomes, uncertain and extended consequences and, personal implications” (Carroll and Buchholtz, 2008 p. 327). This means that various organizations will tend to formulate their own ethical decisions since there is no clear cut formula for making these decisions.

Carroll and Buchholtz argue that even though it is very difficult to formulate a plan for making ethical decisions, a graphical conception which they call they refer to as an “ethics screen” can be used. The main concept behind this idea is that unethical issues are “screened out” while ethical issues are “screened in” (2008). By following this model, the decision is left to individual corporations to find the best ways in which to make ethical decisions that will positively impact the society. The two authors also point out that a simple way of making an ethical decision would be to answer some short questions such as the legality of the decision, whether it is balanced meaning that it is a win-win situation both in the long and short term and its moral standing such as how it makes one feel and if it is morally right.

With regard to the recent economic depression that nearly brought many economies to their knees, the roles of a corporation in the society have been redefined. Although the main objective of a corporate entity will be to maximize the shareholders value, their participation in Corporate Social Responsibility act in the long term good of the business. Corporations should also try to strive for the long term instead of being short sighted by short term goals. Managers who are charged with making decisions in a corporation should ensure that the ethical factor of it is taken care of so as to make sure that the company as well as the community advance forward and this will be beneficial for both the corporation and the community.

References:

Aoki, M. (2010). Corporations in Evolving Diversity: Cognition, Governance and Institutions. New York: Oxford University Press.

Carroll, A. B. & Buchholtz A. K. (2008). Business and Society: Ethics and Stakeholder Management. Mason OH: Cengage Learning.

Chadwick, R. F. and Schroeder, D. (2002). Applied Ethics: Business and economics. London: Taylor & Francis.

Mullerat, R. (2009). International Corporate Social Responsibility: The Role of Corporations in the Economic Order of the 21st Century. New York: Kluwer Law International.

Schminke, M. (1998). Managerial ethics: moral management of people and processes. New Jersey: Routledge.

 

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