Social Responsibility

What Is Social Responsibility?

Social responsibility means that businesses, in addition to maximizing shareholder value, must act in a manner that benefits society. Social responsibility has become increasingly important to investors and consumers who seek investments that are not just profitable but also contribute to the welfare of society and the environment. However, critics argue that the basic nature of business does not consider society as a stakeholder.

Understanding Social Responsibility

Social responsibility means that individuals and companies have a duty to act in the best interests of their environment and society as a whole. Social responsibility, as it applies to business, is known as corporate social responsibility (CSR), and is becoming a more prominent area of focus within businesses due to shifting social norms.

The crux of this theory is to enact policies that promote an ethical balance between the dual mandates of striving for profitability and benefiting society as a whole. These policies can be either ones of commission (philanthropy: donations of money, time, or resources) or omission (e.g., "go green" initiatives like reducing greenhouse gases or abiding by EPA regulations to limit pollution).

Many companies, such as those with "green" policies, have made social responsibility an integral part of their business models, and they have done so without compromising profitability. In 2019, Forbes named the top 100 socially responsible companies in the world. Topping the list is the Lego Group, followed closely by Natura (NTCO), then technology giants, Microsoft (MSFT), and Google (GOOGL). At the bottom of the list in spot 100 is Starbucks (SBUX).

Additionally, more and more investors and consumers are factoring in a company's commitment to socially responsible practices before making an investment or purchase. As such, embracing social responsibility can benefit the prime directive: maximization of shareholder value.

There is a moral imperative, as well. Actions, or lack thereof, will affect future generations. Put simply, being socially responsible is just good business practice, and a failure to do so can have a deleterious effect on the balance sheet.

In general, social responsibility is more effective when a company takes it on voluntarily, as opposed to being required by the government to do so through regulation. Social responsibility can boost company morale, and this is especially true when a company can engage employees with its social causes.

Social Responsibility in Practice

The International Organization for Standardization (ISO) emphasizes that a business's ability to maintain a balance between pursuing economic performance and adhering to societal and environmental issues is a critical factor in operating efficiently and effectively. 

Social responsibility takes on different meanings within industries and companies. For example, Starbucks Corp. and Ben & Jerry's Homemade Holdings Inc. have blended social responsibility into the core of their operations.

Both companies purchase Fair Trade Certified ingredients to manufacture their products and actively support sustainable farming in the regions where they source ingredients. Big-box retailer Target Corp., also well known for its social responsibility programs, has donated money to communities in which the stores operate, including education grants. 

The key ways a company embraces social responsibility include philanthropy, promoting volunteering, and environmental changes. Companies managing their environmental impact might look to reduce their carbon footprint and limit waste. There's also the social responsibility of ethical practices for employees, which can mean offering a fair wage, which arises when there are limited employee protection laws.

Criticism of Social Responsibility

Not everyone believes that businesses should have a social conscience. Economist Milton Friedman stated that "social responsibilities of business are notable for their analytical looseness and lack of rigor." Friedman believed that only individuals can have a sense of social responsibility. Businesses, by their very nature, cannot. Some experts believe that social responsibility defies the very point of being in business: profit above all else.