Aqsa Saif | 20110074 | FINN 383

Socio-Economic Impact of Modern Corporations

The classical view describes an organization, as a nexus of contracts, and management’s

primary responsibility in running the business as maximizing profits and shareholder value.

In contrast, the socio-economic view holds that management should take into account the

broader social welfare, not just the corporate profit. There is a shift from nexus of contracts to

constellations of interest, which refers to the concept of “Social Entity Concept”, where an

arbitrator has replaced an aggressive profit-seeking executive. In addition to shareholders

value, there is growing recognition of the role and contribution of other stakeholder groups

fundamental for the company’s performance. The contractual stakeholders including

employees, lenders, customers, suppliers have a relationship with the firm, in which they

provide vital resources, and in return receive some value. The diagram refers to the essential

features of a company from legal standpoint, which portrays all the immediate/ contractual

stakeholders and the community stakeholders.

Pressure Groups (Unions)

Regulators
Company has various Stakeholders:
Government
Employees Firm
Local Community Suppliers Management (CEO &
Lenders under)
Capital Market Customers Shareholders
Distributors Board of Directors
Media Clients
Public

Figure
P
1: Stakeholders affected due to the socio-economic impact of corporations

Social/Economic Impact: A corporation should focus on building long-term relationship

with stakeholders, as there are the assets of a firm. An organization can positively contribute

to the society if it considers actions and behaviors such as it can provide meaningful

employment and training opportunities to the employees, pay them over-market fair wages,
 Aqsa Saif | 20110074 | FINN 383

provide security and offer social protection through safe working conditions and occupational

health and safety. Similarly, it can better serve the needs and wants of the customers by

innovating high-quality, healthy goods and services that satisfy their requirements. As part of

corporate social responsibility, a firm can improve the well-being of the community by

investing in educational projects, paying charities, and by collaborating with NGOs to

advance people’s personal security. A firm can positively contribute to the social

environment through participation with additional funds in social projects, which can

influence the lives of local people.

Firms can contribute to the economy by ensuring the organization’s survival, long-term

success, value addition, and consistent returns to the investors. The primary objective of

management is to create value for the shareholders, who are the residual claimants of the

firm. The shareholders demand consistent dividend payments and appreciation in the price of

the stock. As a social entity, a company shifts the focus from profit maximization to profit

satisfaction. A firm can develop expertise over time, as it invests in new technologies and

new ventures. Similarly, a firm is expected to comply with sustainable business practices in

supply chains by providing reliable assistance to stakeholder (distributors, suppliers) to

meet their expectations.

Moreover, the firm needs to comply with government regulations, obey laws, collect and

pay taxes, and adhere to the standards and policies. An important source of government

funding comes from the income taxes; therefore companies can economically create value by

deducting personal taxes from employees’ income and making payments to the government.

Overall, it can be concluded that company is a legal person; therefore it should act as a

responsible citizen. The company is expected to strive a balance among the competing

interests of the stakeholders. Shareholders, one of the stakeholders, are entitled to return on
 Aqsa Saif | 20110074 | FINN 383

investment, after the claims of other stakeholders have been satisfied. Lastly, measuring the

socio-economic impact of corporations is an essential corporate task in the global arena.