Ateneo de Davao University

Senior High School

Business Ethics and Social Responsibility

Handouts

Lesson 4: Models and Frameworks of Social Responsibility

As individuals, we all have roles to play in society. These roles have accompanying responsibilities. For
example, it is the parents’ responsibility to clothe, feed, and educate their children. Children, on the other
hand, carry the responsibility of caring for younger siblings, if they have any, and performing their tasks at
home and in school.

A business can be likened to an individual in the sense that it also has responsibilities. In defining what the
responsibilities of a company are, and to whom it is answerable to, we need to understand what social
responsibility is.

Social responsibility is an idea that suggests that organizations behave ethically and with consideration to
social, cultural, economic, and environmental issues. Outwardly, this could translate to a business entity
donating to a local charity or creating an outreach program for the company to participate in. However, it can
also take on less obvious forms, such as spending for better quality materials in order to ensure that its product
gives the customers their money’s worth or it might be improving the benefits of one’s employees so that they
in turn will be more productive in work. However, how social responsibility is viewed depends largely on
what theory an entrepreneur adheres to.

I. Stockholder or Shareholder Theory (Classical Model)

Milton Friedman is most associated with this theory because of his statement that the company’s
social responsibility is to increase profits. In this model, companies exist to serve the interests of
their stockholders, or shareholders, and their primary obligation is to make as much money as
possible as long as their practices conform with the law.

Who are the stockholders or shareholders? They are individuals who own a business or at least a
part of it. As owners, the shareholders employ other people to run their company, but it is clear
to all parties concerned that their singular goal is profit. In simple terms, the sole purpose of the
business is to create and maximize profits because if it does not make a profit it will soon find
itself bankrupt.

Invisible Hand
Espoused by Adam Smith in the 18th century, the Invisible Hand is a metaphor used in economics
to describe the unintended social benefits of an individual’s pursuit of his/her own interest.
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 Applied in the light of the Stockholder theory, one might say that if a business is left to pursue its
goal, which is to make a profit, it will inevitably end up doing good things for the public. For
example, a businessman who pays his employees correctly will gain a good reputation in the
community and would more likely improve sales because of positive feedback. Likewise,
companies would not knowingly engage in activities that would bring them into bad light simply
because it would not make economic sense for them to do so. Those companies would most likely
lose money because it would bring them bad press exposure, which would then destroy investor
confidence, affect the sales, and hurt the bottom line.

Criticism of the Classical Model

The Stockholder or Shareholder Theory has been frequently criticized for its supposed self-
serving goal of profit maximization. A singular focus on the creation of profit can lead to
disastrous results for some companies as you will see in the following case studies.

II. Stakeholder Theory

The Stakeholder Theory is more encompassing framework that goes beyond the philosophy of
maximizing profits for the shareholders; rather, it states that a company should be responsible,
not just to its shareholders but to its stakeholders as well. Proponents, such as R. Edward Freeman,
believe that value created for the stakeholders must not resort to tradeoffs and that a truly great
company is able to align the stakeholders’ interests with its own mission and vision.

In the traditional view of a firm, a company is answerable to the owners and stockholders of the
company. In the Stakeholder Theory, a typical company has many stakeholders. A stakeholder is
defined as any person, group, or organization that has an interest or concern in the enterprise.
Here are some stakeholders that a business needs to be answerable.

1. Its employees. Does the company give the employees fair wages and benefits?
2. Its suppliers. Does the business pat its suppliers on time?
3. Its regulators. Does the company comply with government regulations, such as licenses,
permits, and tax compliance?
4. Its financiers. Does the company repay its creditors and offer fair and attractive returns to its
investors?
5. Its competitors. Does the company employ fair business practices in terms of marketing,
without discrediting its competitors?
6. Its customers. Does the company provide value through its products or services which support
positive human values?
7. The media. Does the company communicate products and services truthfully?
8. Society. Does the company show concern for worthwhile causes, such as the environment and
its community members?

Many companies now espouse Corporate Social Responsibility (CSR), which recognizes the
economic, legal, ethical, and even philanthropic responsibilities of corporations in the world
today.

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 While there are companies who declare their CSR and use this as a means of creating positive
public relations, there are a handful of companies that go beyond what is government-
mandated in order to serve their community genuinely.

III. Responsibilities and Accountabilities of Entrepreneurs

Now that social responsibility and its framework have been defined, it is important to know what
business owners should be responsible in the operation of their business.

In doing this, let us go back to the list of stakeholders. While companies may consider and value
stakeholders differently, let us focus on the two categories of stakeholders and how to differentiate
one from the other.

Internal STAKEHOLDERS External

BASIS FOR COMPARISON INTERNAL EXTERNAL

STAKEHOLDERS STAKEHOLDERS

Meaning The individuals and parties that The parties or group that are not
directly participate in the a part of the organization but get
management of the company affected by its activities

Nature of Impact Direct Indirect

Who are they? They serve the organization They get influenced by the
organization’s work.

Employed by the entity Yes No

Responsibility of the company Primary Secondary

towards them
Includes Employees, Owners, Managers, Suppliers, Customers, Creditors,
etc. Clients, Intermediaries,
Competitors, Society,
Government, Investors, etc.

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 Internal Stakeholders – These are the groups within a business or the people who work directly
with the business. Without the internal stakeholders, the organization will not be able to survive.
Examples of these are the employees, management, owners, and investors.

Responsibility to:
1) Employees – more and more companies now realize the value of its employees to the
overall success of the company. But, to attract better quality of employees and improve
employee retention, every employer must address the following concern:
(i) Do I provide fair compensation for services provided?
(ii) Do I give timely and regular payments?
(iii) Do I provide proper working and welfare conditions?
(iv) Do my employees feel secure in their jobs?
(v) Do I provide security benefits and better living conditions?
(vi) Do I give training and development opportunity?
(vii) __ Do I recognize and honor individual worker rights?
(viii) _ Do I give fair and unbiased treatment to all?
(ix) Am I fair in distributing rewards?
2) Management – it is important to the managers of the business that their own voices are
heard and that their decisions have an impact on the company.
(i) Do I have face-to-face meetings with my managers to inform them of the company’s
new initiatives?
(ii) Do I take into account the suggestions of my managers when I make business
decisions?
3) Owners – while the Stakeholder Theory puts emphasis on all the stakeholders involved,
it does not undermine its accountability, to the owners of the business. The following are
some of the concern of the owners that need to be addressed.
(i) Is the capital being used properly?
(ii) Is the business being managed effectively?
(iii) Are the owners provided with accurate and timely information?
(iv) Is there growth and appreciation of the owner’s capital?

External Stakeholders – these are groups that do not directly work within the business but are
nevertheless affected by the decisions of the business. Examples are the customers, regulators,
suppliers, and the society in general.

Responsibility to:
1) Customers
(i) Product development and design initiatives
(ii) Customer support
(iii) Accessibility
2) Regulators
(i) BIR
(ii) Office of the City Treasury
(iii) DOLE
(iv) SSS, PhilHealth, Pag-ibig
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 (v) DTI
(vi) SEC
3) Suppliers
(i) Give regular orders for the purchase of goods
(ii) Timely payment of dues
(iii) Fair and equitable transactions
(iv) Environmental protection
(v) Helping supplier in improving or upgrading the quality of its products and/or services
4) Competitors
(i) Commissions offered must not be exceptionally high to agents and distributors
(ii) Discounting to consumers must not go beyond industry practices
(iii) Competitors must not be directly or indirectly defamed
5) Society
(i) Development of Backward Areas
(ii) Financial assistance
(iii) Protection of the Environment
6) Investors – companies must be transparent with its investors; the company’s investment
goals, its sales quotas, business strategies, and expansion plans must be discussed in order
to give its investors a better picture of how the company is managed. Most especially, the
company must be able to assure the investors that
(i) It provides fair returns on the capital invested;
(ii) It supplies complete and accurate information about the company;
(iii) It promotes the public image of the company;
(iv) It undertakes continuous Research and Development (R&D) for diversification;
(v) It builds up financial stability and ensures the safety of the investment;
(vi) It pays interests and the principal in a timely manner; and
(vii) It avoids participation in unethical practices that may bring disrepute to the company

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