Introduction
Businesses are established with the purpose of increasing the shareholders’ value by maximizing profits and minimizing the cost of operation. This calls for businesses to adopt effective business practices that contribute to profit maximization. Pursuing the profit motive means that businesses adopt a capitalistic approach in their operation (Fox 2012). This aspect has been a source of debate amongst different parties for decades. Milton Friedman is one of the renowned supporters of the view that businesses’ only responsibility is to produce profits. According to Horrigan (2010) Friedman is of the view that the only social responsibility that businesses should pursue entails ensuring that its resources are utilized in activities that contribute to profit maximization so long as the businesses stay within the rule of the game’ (p.92). This paper critiques the shareholder value thinking that is prevalent in the contemporary business environment that ‘a businesses’ only responsibility is to produce profits by evaluating the concept of corporate social responsibility.
Analysis
Irrespective of the fact that businesses are established with the motive of maximising the shareholders’ wealth, their responsibility is not limited to shareholders. On the contrary, businesses have a responsibility to other stakeholders in the society within which they operate (Fox 2012). For that reason, businesses should also integrate the environmental and social dimensions in their operation in order to increase the chances of maximising profit. In supporting this view, Trevino and Nelson (2011) emphasises that businesses should incorporate the concept of triple bottom-line, which states that businesses should incorporate the social, economic, and environmental dimension in their operation as opposed to the one-dimensional concept of profit maximisation.
The social dimension is concerned with ensuring that the businesses impact on different stakeholders such as customers, employees, suppliers and the community in general are taken into consideration in the businesses. Conversely, Trevino and Nelson (2011) assert that the environmental dimension emphasizes on the importance of businesses being conscious of their impact on the natural environment and to ensure that necessary measures are taken to protect the environment. The triple bottom-line approach is founded on concept of Corporate Social Responsibility, which proposes that business should focus on benefiting all the stakeholders who are or might be affected by a firm’s operations either directly or indirectly (Haynes, Murray & Dillard 2012).
In line with the concept of CSR, businesses should ensure that their activities are conducted in an ethical manner. This approach plays a critical role in limiting occurrence that might affect a business’s reputation and hence its capacity to operate sustainably. Horrigan (2010) is of the view that a negative business reputation might contribute to loss of investor confidence, which in extreme situation might lead to collapse of a business. In such situations, a businesses’ overall profit maximisation objective might be limited significantly.
One of the notable cases on the impact of businesses failure to integrate the triple bottom-line approach relates to the blowout and subsequent collapse of the Macondo Deepwater Horizon, an offshore oil drilling well at the Gulf of Mexico owned by British Petroleum in 2010 (Stout 2012).Thousands barrels of oil were spilled into the sea, hence causing considerable environmental damage in the Gulf of Mexico. The oil spill affected the tourism and fishing industries in the Gulf Mexico. Moreover, 11 people died as a result of the accident.
Investigation into the cause of the blowout revealed that some of the firm’s employees in collaboration with contractors ignored standard safety procedures in an attempt to minimise the cost of operation (Stout 2012). At the time of the accident, BP was behind the scheduled completion date by over a month and the project’s budget had increased by approximately $60 million (Stout 2012). As a result of the accident, BP’s common share price declined from $ 60 per share to $30 per share leading to loss of BP’s stock market value by approximately $ 100 million. Moreover, the company’s credit rating declined from the prestigious AA rating to BBB, which represents a junk-status.
Investigations into the cause of the blowout further revealed that BP had a history of overlooking safety procedures in conducting its operations. Stout (2012) asserts that ‘BP had sacrificed safety to save time and money’ (p.2). The occurrence of the accident indicates that BP was yet to fully appreciate the importance of entrenching the social and environmental dimensions in its operations. The approach taken by the company to ignore safety procedures in order to minimise the cost of operations further highlight the prevalence of unethical operational practices. Nevertheless, BP’s one-dimensional approach to profit maximisation resulted in a negative outcome that might affect the firm’s future sustainability.
The notion that businesses should solely focus on maximising shareholder value is far-fetched because businesses generate profits from the society in which they operate and in the process result in significant social costs. One of the notable social costs entails emission of greenhouse gases, which increases the rate of climate change (Farber & Peeters 2016). Businesses have duty to ensure that the social cost resulting from their operations is significantly reduced. A survey conducted by the UK Government Economic Service affirmed that a social cost of $29 with reference to carbon emission is defensible (Farber & Peeters 2016). Therefore, in the course of their operation, businesses have a duty to ensure that the social costs arising from their operations are significantly reduced.
Conclusion
The view that businesses’ core responsibility is to maximise profit is not applicable in the contemporary business environment if businesses are to achieve long term sustainability. On the contrary, businesses have a duty to respond to the needs of other stakeholders such as suppliers, customers, employees and the society amongst other stakeholders. In the course of their operation, businesses should focus on entrenching the economic, social and environmental dimensions of sustainability. Focusing on these dimensions will aid in ensuring that the firm adopts ethical business practices. Moreover, entrenching these elements will play a fundamental role in enhancing businesses corporate image. Failure to integrate the economic, social and environmental dimensions might adversely affect a firm’s long-term competitiveness, which is underlined by the case of BP oil spill in the Gulf of Mexico.
Reference List
Farber, D & Peeters, M 2016, Climate change laws, Edward Elgar Publishing, Cheltenham, UK.
Fox, J 2012, The social responsibility of business is to increase …what exactly? [Online]. Available at: <https://hbr.org/2012/04/you-might-disagree-with-milton> (Accessed November 26, 2016).
Haynes, K, Murray, A & Dillard, J 2012, Corporate social responsibility; a research handbook, Routledge, New York.
Horrigan, B 2010, Corporate social responsibility in the 21st century; debates, models and practices across government, law and business, Edward Elgar, Cheltenham, UK.
Stout, L 2012, The shareholder value myth; how putting shareholders first harms investors, Berrett-Koehler Publishers, New York.
Trevino, L & Nelson, K 2011, Managing business ethics; straight talk about how to do it right, John Wiley, New York.
