Executive Summary
This report was commissioned to analyze the benefits of business ethics and social responsibility on the business. The research for this report was based on review of literature from books, case studies, and articles from business management and economics.
The major findings indicate that ethics and Corporate Social Responsibility (CSR) are emerging issues in modern business world. Ethical concerns relate to determination of principles that are right or wrong. This decision is influenced by the characteristics of individuals and organizations. Further investigations reveal that social responsibility deals with business conduct in respect to the broader social values.
These two issues are difficult to decide because they involve direct cost to a firm in the short-run, but their benefits are not certain. They may lead to reduced profitability, and if not well organized losses may arise.
The analysis section identifies the effects of ethics and CSR on the relationship of a business to its major stakeholders, who are identified as employees, investors, and customers. Questions of improved productivity of employees, higher investment and increased number of customers are addressed in this section. Effect of CSR on the reputation of a firm is addressed, and its positive effects investigated.
Therefore, this report recommends that the company should adopt healthy business ethics and participate in activities that enhance social responsibility if it wishes to enhance efficiency, reputation, and the company’s relationship with stakeholders.
Introduction
This report illustrates how business ethics and social responsibility affect the overall performance of the company. It was requested by the CEO for strategic management planning. The company has been facing challenges in the processes of implementing healthy business ethics, but ethics and social responsibility play an important role in business management. The company feels the need to incorporate corporate social responsibility in its organizational culture.
Ethics involves knowing what is wrong and what is right. Usually, the issue of ethics is not a requirement in the law. Ethics are not documented, unlike law and hence, are not enforceable by law. They are also different from personal standard, but rather more of social standards.
Social responsibility involves making business decisions that take into account the wellbeing of the society, alongside that of the firm. This has been an emerging issue in the modern corporate environment, but has had its controversies in relation to the objectives of a profit-making firm. A firm has a responsibility towards its stakeholders who are the investors or shareholders, employees, customers, suppliers, and the government.
In addition, management of a firm pursues efficiency by aiming to achieve the best result, but with constraint of resources and information. Since resources have opportunity cost, ethical and social responsibility should be moderated within the goal of increasing welfare of all the stakeholders of a business (Sims, 2003).
Therefore, the scope of this report is to ascertain whether there is truth, as commonly believed, that ethics and social responsibility have feasible advantages to a firm. It also seeks to evaluate how these issues can be applied in operations to increase efficiency and its effects to the main stakeholders of the organization.
Research Findings
Many studies have been conducted to establish whether business ethics and CSR has positive or negative influence of the financial status of a business. Most of these Studies conclude that there is a small, but considerable positive relationship between the two. A recent Study of the financial performance of economically large companies in the U.S., which are considered most social friendly, found that they have better reputation among the public and other stakeholders and superior financial achievements (Henn, 2009).
Companies that practice society friendly activities and not just profit maximization have better performance. Corporate organizations such as Pfizer, Johnson Controls, and Sunoco have better return on capital, assets, and investment compared to other organizations. This shows better efficiency in utilization of capital, assets, and investment for businesses involves social responsibility and ethics (Johnson, n.d).
For example, Timberland, a company producing shits and climbing boot in the USA, decided to venture in CRS in 1990, regardless of its good financial profitability. It increased the number of hours workers involved themselves in community service. In addition, it paid people to work for six months in their sabbaticals.
This initially led to losses, but as seen today, this has led to increased commitment of employees to the business. This company is currently on the top 100 Best Companies to Work For. Some employees from Timberland say that the reason they work for the company is its engagement in CSR. There are however some of them who thought it would have been better for the company to reduce this during the times when the company incurred losses, instead of laying off part of its employees (Melé & Guillén, 2006).
Furthermore, people prefer to be employed in firms that promote high morals and responsibility. This means that these companies have more candidates available and can therefore pick the most skilled and experienced of laborers. Customers are also inclined to providing market to products of ethical companies.
An enquiry by Walker Research shows that two-thirds of customers would change brands to become consumers of socio-caring businesses, even with price and quality being equal. These forms of efficiencies are however received in the long-run (Dosi, Nelson & Winter, 2000).
Efficiency, Ethics and Social Responsibility
Efficiency of a firm can be divided into two: technical efficiency and allocative efficiency. Allocative efficiency relates to using factors of production in the best mix in consideration of relative factor prices; output is held constant. As one factor becomes more expensive relative to the other, an efficient firm should substitute the relatively expensive factor for the other to maintain a given level of output (Robbins, 2001).
A business practicing CSR has the ability to attract more supply of labor. A good example of this is the increased number of people seeking Jobs in Timberland Limited after it intensified CSR projects. A firm becomes in a better position to set the most efficient wages rates and optimal number of employees due to adequate supply. This gives it the ability to control factor input ratios and factor prices ratios. This leads to allocative efficiency (Hicks, 2002).
Technical efficiency involves ability of a firm to produce maximum output, given its inputs. Therefore, technical inefficiency is experienced when a firm with a given level of input combination produces less than the maximum possible output. Business Ethics and CSR increase the mentioned efficiencies. Technical efficiency is also better ensured through CSR. As shown previously, technical inefficiency comes about when a firm produces output less than the expected output.
This may be caused by go-slows by disgruntled employees and lack of good working conditions, which allow for maximal use of abilities of employees and poor skills of employees. Langlois (2006) asserts that a firm with technical inefficiency will have lower output levels compared to a similar company which utilizes all abilities and skills of its employees. This will be so even with similar technology and input levels.
Employee Relationship and CSR
CSR and Ethics come in handy to eliminate the mentioned forms of inefficiency. For instance, Timberland’s employees also expressed commitment to the company hence go-slows were not likely in their activities. McNamara (2010) suggests that a company with ethics may engage in capacity improving efforts, including skilling employees and encouraging them to further their education.
This is extra cost to the company in the short run and it is not certain that the employees will continue working for it. Benefit of more productivity per employee will be experience in long-run. All the above CSR efforts lead to higher levels of technical efficiency.
Customer Turnover and Reputation of a Firm
It is universally agreed that economic responsibility is the main duty of a firm. This is achieved by ensuring profitability of a firm through maximization of total revenues and minimization of costs. Technical efficiency takes care of the form while allocative efficiency does the later.
This therefore mean CSR and ethics have an indirect, but positive effect to the profit of a firm. Revenues can in addition be maximized by avoiding unintended investment, which arises due to increased stock levels attributed to reduce demand. This change in market forces can be mitigated by a firm through CSR, thus providing trust and excellent reputation (Brenner, 1992).
Investments, Ethics and CSR
Sales in business and value addition are increased by developing products that are friendly to the environment. Investors prefer social responsible businesses because it is an indication of proper management and a good reputation (McNamara, 2009).
However, if a company produces products that are detrimental to the environment, there is high chance that the company’s image can be destroyed. The effect of pollution on air, water, and land calls for the need to observe ecological and environmental quality to attract potential investors.
Analysis
From the findings, business ethics and CSR would play a major role in increasing the company’s efficiency. First, CSR improves technical efficiency and allocative efficiency of a firm. When the company practices CSR, it is able to attract more supply labor, and thus reducing costs in production.
In addition, a firm with healthy ethics improves its relationships with employees, investors, and customers. Ethics leads to providence of good working conditions that are safe and healthy for employees. This ensures no absence is requested because of injuries to employees or preventable diseases.
Customers are more loyal to a business that show loyalty to them by not doing unethical practices like hoarding and establishment of inflated prices that do not reflect the cost of production. Companies that engage in CSR have more customers who purchase their products because they anticipate additional value of their money through efforts of the company in improving social welfare. This means that their products offer more utility compared to similar products from strictly profit-oriented firms (Metcalfe, 2004).
Moreover, Social responsibility increases the customer base and attracts investors. Being a social responsible organization would enable the business to gain a competitive advantage. This is because investors are more interested on the image of a company with regards to environmental preservation. Thus, observing clean environment would enhance the company’s reputation.
Recommendations
From the research findings, the company should set up healthy ethical standards, and engage in CRS activities like cleaning the existing pollution, start processes to reduce pollution, control noise, recycle materials, and perform aesthetic improvements. In addition, the company should invest in improving skills of its employees through reviewing its codes of conduct.
To increase substitutability of the firm’s inputs, it should increase labor supplied to it by offering rewards to exemplary employees and whistle-blowers. Furthermore, the company should take part in the following aspects: improve environmental quality, provide truthful advertisement, start industries in marginal areas, provide equal employment rights, develop quality products, and enable freedom of participation in company’s affairs.
Conclusion
The general conclusion that can be derived from this research is that social responsibility is part of business ethics that require managers to be open in their business engagements. Observing ethics and social responsibility would improve the company’s image and results to profit maximization.
As explained in this paper, ethics and social responsibility requires constant changes in organizational conduct and performance. The major points discussed in this report include efficiency of the firm, employee relationship, customer turnover, and investors’ relationship to the company. The driving force here is observation of business ethics and social responsibility.
In this light, the recommended action of observing healthy business ethics and taking part in social responsibility has several benefits to the firm. Knowing ethical and social norms would help customers to keep the company in tandem with the society’s expectations. The company should work in a way that is lawful, beneficial, ethical, and inline with social commands.
Ethics in business would enable the company to maximize profits, utilize business resources, and create support in the market. Ethical values should command what is suitable to pay employees as well as to charge consumers. The company is therefore required to have a culture that enhances strong values.
In addition, social responsibility improves the public image of the organization and enhances the local economy. Trust and excellent reputation are among the most important assets in a business that can only be realized through social responsibility.
Social responsibility also attracts and retains employees who are committed to their task, hence improved performance; by doing so, the company can reduce the cost of recruitment. Moreover, social responsibility increases the customer base and attracts investors. Being a social responsible organization will enable the company to gain competitive advantage. Therefore, developing products that are friendly to the environment adds value and increases sales in business.
References
Brenner, S. N. (1992). Ethics Programs and Their Dimensions. Journal of Business Ethics, 11, 391-399.
Dosi, G., Nelson R. & Winter, G. (2000). The Nature and Dynamics of Organizational Capabilities. Oxford: Oxford University Press.
Henn, K. (2009). Business Ethics: A Case Study Approach. New Jersey: John Wiley & Sons, Inc.
Hicks, P. (2002). Value and Capital: An Inquiry into Fundamental Principles of Economic Theory. Oxford: Clarendon Paperbacks.
Johnson, K.W. (n.d). Integrating Applied Ethics and Social Responsibility. Ethical Complexity or Ethical Chaos?. Ethics and Policy Integration Center. Retrieved from http://www.ethicaledge.com/Integration_Social_Responsibility.pdf
Langlois, N. (2006). The Dynamics of Industrial Capitalism. Oxford: Routledge.
McNamara, C. (2010). Complete Guide to Ethics Management: An Ethics Toolkit for Managers. Free Management Library. Retrieved from https://managementhelp.org/businessethics/ethics-guide.htm
Melé, D. & M. Guillén (2006). The Intellectual Evolution of Strategic Management and its Relationship with Ethics and Social Responsibility. IESE Working Paper, 658.
Metcalfe, J. (2004). The Entrepreneur and the Style of Modern Economics. Journal of Evolutionary Economics, 14,157-175.
Robbins, D. (2001). An Essay on the Nature and Significance of Economic Science (2nd ed.). London: Macmillan Publishers.