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Social Responsibility Session-3
Coverage • Theory of the organization • For whom the organization exist • What does corporate social responsibility mean • Theories those stress manager’s obligations to share holders and society
Meaning of social responsibility • Managers are responsible for voluntary actions only • Responsibility towards internal members of the organization- They define right or wrong, good and bad – may use organization to fulfill their personal interests so confirmation from the laws of society is needed • Towards the laws of society
Corporate social responsibility • Is the obligation voluntary?-Religious demographic humanistic • What does the obligation usually consists?-Philanthropy or using skill to tackle social problems • Why should manager be socially responsible?-This is because of concern of others or fear of disruption
Continue • Andrew Carnegie approach- become profitable to be socially responsible • Rosenwald approach- Profit opportunities lies in meeting social needs only- Drucker- identify social needs is most effective approach • It would help in winning the support of all stake holders
Empirical evidences • Seven out of fourteen positive- three negative, one ’U’ shaped extreme social performance negatively related. • Study by Spencer - relating corporate crime and philanthropy with ROA and ROS found positive relationship but not clear about causal relationship • Another study based on fortune magazine’s survey of executive found that Previous year financial performance is strongly related to financial performance while subsequent year’s weak.
Theories – Agency theory • Hayek and Friedman – they are trustees of share holders based on principal of fiduciary relation • Because of time, expertise and distance managers are hired to work on behalf of owners. Relation is of principal and agent • Agent might have other interests.- principal might impose incentives and cost • But if principal's orders are unreasonable agent has no duty to obey i.e. illegal, Threaten safety, violate business custom, difficult to carry out etc. • As per economists they are agents of shareholders add wealth, they are residual claimants
Hayek’s views • Owners have limited liability- hence corporation is expected to serve the public and so most productive use. • Thus decency and charity are binding on corporation- it ensure long term returns • Social consideration is wide concept so scope for misuse. • Separation of ownership and control put shareholder to subordinate position
Friedman's Positio0n • Business do not have responsibility only people have • Proprietors may use their property the way they like, so managers • In a non profit org goal may be different • Otherwise managers have no right to tax owners • Managers can not use other’s wealth even for unselfish purposes • They may do so with their wealth • Mangers hide their profit motive behind aura of social responsibility • Hayek- Shareholder dominance maximizes output • Friedman- It is consistent with individual liberty
Managerial control • In practice managers dominate • Mangers are concentrated while owners are dispersed vastly • Manager use corporate property in their self interests • Managers are interested in expanding the business beyond level of maximizing shareholders wealth. Retained earning more than expected is used for growth • They use discretionary profit for staff , compensation and perks • They maximize their income by avoiding risk even at the cost of future profits for owners. • Managers are risk averse , they put prevention of loss ahead of returns, They ensure their survival at the cost of shareholders • Investor diversify their risk themselves than what is the need of conglomeration .This managers effort to diversify his risk
Criticism • Empirical evidence is that family owners and institutional investors are able to defeat takeovers. • Board of governors can regulate, monitor, guide advise and control CEOs • There is a control by market- Competitive labor market and rating agencies
Behavioral theory • Carnegie-Mellon university- there are several pressure groups who determine manager’s behavior • Differentiation and specialization under pressure to enhance and maintain profits. • Prestige, stability, liquidity and market share are other measures of profitability rather that return per share • There is a trade off between short term and long term gains • There are multiple centers of power all groups of stakeholders within and outside organization • There are financial responsibilities to shareholders, legal responsibility to law and public policy and ethical responsibility to moral values. They effect organization, psychology of managers and need filtering of decisions and they all determine manager’s behavior