The villain of the film "Wall Street" started a speech with the word "Greed is good". The most charitable explanation of this statement was that it was a reaffirmation of Adam Smith's economic philosophy. Smith argued that the pursuit of self interest in a competitive market would ensure the common good. However, it is a doubtful case for the villain of "Wall Street", because he ruthlessly sought power and wealth and was prepared to trample on anyone who got in his way.
Should self interest be the sole objective of business or should there be an acceptance of organisation's responsibility to society? Economists like Adam Smith or Milton Friedman reject the notion about a business organisation's responsibility to the community. They argued that all we should expect from them is efficient profitable production, creating jobs and providing goods and services at the price and quality that the customers desire.
As profits are derived from efficient production, any reduction of it in pursuit of social objectives leads to a decline in economic efficiency. Moreover, under company law directors and managers are required to serve the interests of shareholders.
The belief that business organisation should act in a socially responsible way comes from those who believe that with economic power comes economic and social responsibility. Firms do not exist in isolation but within the community. The actions of all firms, especially large firms have an impact on society ( pollution, job loss, prosperity or poverty) and, therefore, firms should consider the impact on the community in their decision making. It would be wrong to believe that firms always behave in a socially responsible way, but it is cynical to believe that they are incapable of behaving in such a manner.
The major test of social responsibility relates to issues of (i) environment; (ii) treatment of employees; (iii) treatment of customers (iv) welfare of disadvantaged groups; (v) arts and education; and (vi) ethical issues.
The natural environment is now a matter of great concern. Nature has given us valuable resources, some of which are non-renewable. It is the duty of each generation to ensure that resources remain available to the future generation. Even renewable resources (soil, rivers, fish stocks ) have to be carefully looked after. It would be an act of gross irresponsibility if selfish behaviour by us jeopardised the future of the next generation.
Firms have traditionally been judged in terms of efficiency and profitability. Data on the commercial performance of a firm is recorded in its Profit and Loss Account and Balance Sheet. A social audit extends the accounting principle to the social sphere. Different interest groups in society will judge firms in different ways. Thus, shareholders judge companies in terms of return on investment. Employees judge them in terms of working condition, pay, supervision, fairness of employers, job security etc. Customers judge the same in terms of price, quality and suppliers do the same in terms of promptness of payments. Meanwhile, creditors assess the performance of companies in terms of credit worthiness and promptness of repayment of debt, while the society does it in terms of concern for, and respect of, the community and environment.
A social audit may highlight those areas of firm's activities which harm the environment as well as the activities beneficial to environment. All concerned would hope that all firms will behave in a socially responsible manner.
Finally, socially responsible behaviour is a form of enlightened self-interest. Support for art is good for publicity. Leaders of commerce and industry realise that self-regulation reduces the danger of legislative action. The truly socially responsible firm accepts that as it takes from society, it has a duty to make a contribution to society.
The writer is Secretary General of BTMA