Model Answer
0 min readIntroduction
The debate surrounding the purpose of a business organization has persisted for decades. Traditionally, the dominant view, championed by economist Milton Friedman, posits that a business’s sole responsibility is to maximize profits for its owners, operating within the legal framework. This perspective emphasizes the agency relationship between principals (owners) and agents (managers). However, with increasing globalization, heightened social awareness, and growing concerns about sustainability, the notion of businesses solely focusing on profit maximization is being challenged. This essay will critically examine the statement – “A business organisation's sole responsibility is to further the interest of its owners within the boundaries of legal framework and business organisations cannot be charged with social responsibilities” – and argue that while profitability is essential, businesses have a broader responsibility towards stakeholders and society.
Arguments Against the Statement: The Case for Social Responsibility
The assertion that businesses have no social responsibility beyond legal compliance is increasingly untenable. Several arguments support a broader view of corporate purpose:
- Ethical Considerations: Businesses operate within society and benefit from its resources, infrastructure, and workforce. Therefore, they have an ethical obligation to contribute positively to the well-being of that society. Ignoring social and environmental impacts can be considered morally reprehensible.
- Long-Term Self-Interest: While short-term profit maximization might seem appealing, neglecting social responsibility can lead to long-term risks. Damage to reputation, consumer boycotts, regulatory scrutiny, and loss of employee morale can all negatively impact profitability.
- Stakeholder Theory: This theory, popularized by R. Edward Freeman (1984), argues that businesses should consider the interests of all stakeholders – including employees, customers, suppliers, communities, and the environment – not just shareholders. Satisfying stakeholder needs can create a more sustainable and resilient business model.
- The Business Case for CSR: Numerous studies demonstrate a positive correlation between CSR and financial performance. Companies with strong CSR practices often attract and retain talent, enhance brand reputation, and gain access to new markets.
- Legal Developments: Increasingly, legal frameworks are incorporating elements of social responsibility. For example, India’s Companies Act, 2013, mandates CSR spending for certain profitable companies (Section 135). Environmental regulations and labor laws also impose social obligations on businesses.
Arguments Supporting the Statement: The Shareholder Primacy View
Despite the growing acceptance of CSR, the shareholder primacy view retains significant support. Key arguments include:
- Agency Problem: Managers are agents of the shareholders and have a fiduciary duty to maximize shareholder value. Deviating from this goal can be seen as a breach of trust.
- Efficiency and Resource Allocation: Focusing on profit maximization leads to efficient resource allocation and economic growth. Social initiatives, if not profitable, can divert resources from more productive uses.
- Lack of Accountability: Businesses lack the democratic legitimacy to make social decisions. These decisions are better left to governments and civil society organizations.
- Difficulty in Measuring Social Impact: Quantifying the social impact of business activities can be challenging, making it difficult to assess the effectiveness of CSR initiatives.
Examples of Businesses Embracing Social Responsibility
Several companies demonstrate that profitability and social responsibility are not mutually exclusive:
- Patagonia: Known for its commitment to environmental sustainability, Patagonia donates 1% of its sales to environmental organizations and actively advocates for conservation.
- Unilever: Through its Sustainable Living Plan, Unilever aims to decouple growth from environmental impact and increase positive social impact.
- Tata Group: The Tata Group has a long history of philanthropic activities and social initiatives, demonstrating a commitment to community development.
The Indian Context
In India, the Companies Act, 2013, introduced mandatory CSR provisions, requiring companies with a net worth of ₹500 crore or more, or a turnover of ₹1000 crore or more, or a net profit of ₹5 crore or more, to spend 2% of their average net profit on CSR activities. This legislation reflects a growing recognition of the importance of corporate social responsibility in the Indian context. However, the implementation and effectiveness of these provisions remain a subject of debate.
| Perspective | Arguments | Limitations |
|---|---|---|
| Shareholder Primacy | Maximizes efficiency, fulfills fiduciary duty, clear accountability. | Ignores ethical concerns, potential for negative externalities, can harm long-term sustainability. |
| Stakeholder Theory | Promotes ethical behavior, enhances long-term value, fosters positive relationships. | Can be complex to implement, potential for conflicting stakeholder interests, difficulty in measuring impact. |
Conclusion
In conclusion, while the pursuit of profit remains a fundamental objective for any business organization, the notion that this is its *sole* responsibility is increasingly outdated and unsustainable. Businesses operate within a complex ecosystem and have a moral, ethical, and increasingly legal obligation to consider the interests of all stakeholders. A balanced approach, integrating social and environmental considerations into core business strategies, is not only ethically sound but also strategically advantageous. The future of business lies in embracing a broader definition of value creation that encompasses not just financial returns but also positive social and environmental impact.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.