CHAPTER One

Introduction to business Ethics and

social responsibility

Brief Contents
1. Meaning and Definitions of Social Responsibility of Business
2. Justification for Social Responsibility
3. Nature of Social Responsibility
4. Social Responsibility of Business towards Society
5. Need for Social Responsibility
6. Concept of Social Responsibility
7. Perspectives of Social Responsibility
8. Barriers to Social Responsibility
9. Voluntary Guidelines for Corporate Social Responsibility

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 1. Social Responsibility of Business
Meaning:

Social responsibility is a means of achieving sustainability. Adopting key social responsibility

principles, such as accountability and transparency, can help ensure the long-term viability and
success of any organization or system.

Social responsibility of business implies the obligations of the management of a business

enterprise to protect the interests of the society.

The concept of social responsibility in relation to business means that the firm functions to
accomplish its financial objectives and serves the society as well. No business exists in isolation.
Every organ of the society contributes towards the success of a business. Thus it becomes
imperative that business too does something for the society in return. This responsibility of
business towards the society is called social responsibility.

A socially responsible firm should not work solely for profit maximization but should also seek
the welfare of different sections of the society. Social responsibility of business refers to its
obligations to take those decisions and perform those actions which are acceptable in terms of
the objectives and values of the society.
In 2010, the International Organization for Standardization (ISO) published an international
standard, ISO 26000, to help organizations assess and address their social responsibilities. ISO
26000-2010: Guidance on Social Responsibility defines social responsibility as:

The responsibility of an organization for the impacts of its decisions and activities on society and
the environment, through transparent and ethical behavior that:

 Contributes to sustainable development, including health and the welfare of society

 Takes into account the expectations of stakeholders
 Is in compliance with applicable laws and consistent with international norms of behavior
 Is integrated throughout the organization and practiced in its relationships

Organizations can achieve sustainability by paying careful attention to their impact on society
and the environment. Behaving in a transparent, ethical manner ensures an approach that helps
protect the long-term success of society and the environment.

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Another tenet of social responsibility is the triple bottom line, also known as "people, planet, and
profit." This is the belief that achieving profit does not require harm to the planet or the
exploitation of people. Organizations can profit while also taking care of the planet and people.

According to the concept of social responsibility the objective of managers for taking business
decisions is not merely to maximize profits or shareholders’ value but also to serve and protect
the interests of other members of a society such as workers, consumers and the community as a
whole.

The Business Case for Social Responsibility and Quality

CORE SUBJECTS AND KEY PRINCIPLES OF SOCIAL RESPONSIBILITY

ISO 26000-2010: Guidance on Social Responsibility identifies seven core social responsibility
subjects:
1. Organizational governance
2. Human rights
3. Labor practices
4. Environment
5. Fair operating practices
6. Consumer issues
7. Community involvement and development

In addition to the core subjects, ISO 26000 also defines seven key principles of socially
responsible behavior:
1. Accountability
2. Transparency
3. Ethical behavior

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 4. Respect for stakeholder interests 
5. Respect for the rule of law
6. Respect for international norms of behavior
7. Respect for human rights

Working in harmony with the community and environment around us and not cheating our
customers and workers we might not gain anything in the short run but in the long term it means
greater profits and shareholders’ value’.
2. Social Responsibility of Business: Justification for Social Responsibility:
Every business organization operates in an environment with which it interacts. No organization
can survive in the absence of environment. It has to draw its inputs like manpower, money,
machines, material, etc., from its environment. After converting the inputs into output, the
organization sells it to the various segments of society that are the important components of the
environment.
Thus, for its very existence, a business organization depends on the society both for the
procurement of required input and disposal of its output. When this is the case, it becomes
obligatory on the part of business also to do its best for the welfare of the various sections of the
society.
There are no two opinions that making reasonable amount of profits is necessary for the survival
and growth of business. There is also no controversy over the fact that the business should take
care of the interests of customers. But along with these two basic objectives, the business should
pay due attention to the long-term welfare of the society.
Today, it is expected of the business to take on itself the responsibility for serving and
safeguarding the social interests as one of its important objectives.
Business can significantly assist the development of backward areas, agriculture, weaker sections
of the society, social welfare and can also lead towards community development. With enormous
resources at their disposal, the business organizations, specially the bigger ones, can decidedly
play an important role towards social welfare and thus can be the pace-setters.

3. Social Responsibility of Business: Nature:

The term Social Responsibility of Business reflects the impact of a corporation’s activities on
society. This embodies the performance of its economic function and other actions taken to
contribute to the quality of life. These activities may extend beyond meeting the letter of law due
to the pressures of competition or the requirements of contracts.

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‘Corporate Social Responsibility of a business is operating in a manner which meets or excels
the ethical, legal, commercial and public expectations that a society has from the business.’
The term corporate social responsibility refers to the concept of business being accountable to
how it manages the impact of its processes on stakeholders on a voluntary basis.
Since corporate have to draw on the community in which they operate for all resources, they also
have obligations to their multiple stakeholders. Stakeholders are defined as those who get
affected by corporate policies and practices. It is acknowledged fact that business has not just
financial accountability but also has the social and environmental responsibility. It is generally
known as the triple bottom-line of good governance.
The licenses to operate in the societies trust that an organization will work in the best interest of
the society. Society itself is increasingly being critical about the operating norms in the industry.
Business cannot be seen as aggravating the problems of the merger, poverty, and depletion of
natural resources or inequities.
Entry barriers, adverse judgment from judiciaries or earlier, business was expected to serve the
purpose of its stockholders as a creator of financial wealth. But now business is assigned to
fulfill the expectations of different stakeholders like consumers, employees, shareholders,
society, community, environment and government etc.

4. Social Responsibility of Business towards Society:

It is evident from above; the social responsibility of business implies that a corporate enterprise
has to serve interests other than that of common shareholders who, of course, expect that their
rate of return, value or wealth should be maximized.

But in today’s world the interest of other stakeholders, community and environment must be
protected and promoted. Social responsibility of business enterprises to the various stakeholders
and society in general is considered to be the result of a social Fig. 1.2. Responsibility of
Business Enterprises towards Stakeholders and Society in General contract.

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Social contract is a set of rules that defines the agreed interrelationship between various elements
of a society. The social contract often involves a quid pro quo (i.e. something given in exchange
for another). In the social contract, one party to the contract gives something and expects a
certain thing or behavior pattern from the other.
In the present context the social contract is concerned with the relationship of a business
enterprise with various stakeholders such as shareholders, employees, consumers, government
and society in general. The business enterprises happen to have resources because society
consisting of various stakeholders has given them this right and therefore it expects from them to
use them to for serving the interests of all of them.
Though all stakeholders including the society in general are affected by the business activities of
a corporate enterprise, managers may not acknowledge responsibility to them. Social
responsibility of business implies that corporate managers must promote the interests of all
stakeholders not merely of shareholders who happen to be the so called owners of the business
enterprises.
1. Responsibility to Shareholders:
In the context of good corporate governance, a corporate enterprise must recognize the rights of
shareholders and protect their interests. It should respect shareholders’ right to information and
respect their right to submit proposals to vote and to ask questions at the annual general body
meeting.
The corporate enterprise should observe the best code of conduct in its dealings with the
shareholders. However, the corporate Board and management try to increase profits or
shareholders’ value but in pursuing this objective, they should protect the interests of employees,
consumers and other stakeholders. Its special responsibility is that in its efforts to increase profits
or shareholders’ value it should not pollute the environment.
The shareholders take great risk in making investment in a business. Therefore, a business
organization is responsible to safeguard the interest of shareholders who are its owners.
This can be done by:
i. Ensuring a fair return on the investment made by shareholders, this is possible when the
enterprise earns adequate profit;
ii. Keeping the shareholders informed about the functioning of the organization;
iii. Strengthening and consolidating the position of enterprise;
iv. Generating adequate funds and reserves for re-investment and also for declaring
reasonable by dividend during a lean period;
v. Building up the company’s financial independence;
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 vi. Keeping up the prices of shares; and
vii. Improving the public image of the company.
2. Responsibility to Employees:
The success of a business enterprise depends to a large extent on the morale of its employees.
Employees make valuable contribution to the activities of a business organization. The corporate
enterprise should have good and fair employment practices and industrial relations to enhance its
productivity. It must recognize the rights of workers or employees to freedom of association and
free collective bargaining. Besides, it should not discriminate between various employees.
The most important responsibility of a corporate enterprise towards employees is the payment of
fair wages to them and provides healthy and good working conditions. The business enterprises
should recognize the need for providing essential labor welfare activities to their employees;
especially they should take care of women workers. Besides, the enterprises should make
arrangements for proper training and education of the workers to enhance their skills.
A business organization can run effectively only when the morale of its employees is high and
their needs are fully met.
Hence, the management owes responsibility towards its employees which it can discharge
in the following manner:
i. Fair wages to employees.
ii. Adequate training and development facilities.
iii. Reasonable opportunities for promotion.
iv. Good working and living conditions.
v. Adequate welfare facilities and amenities.
vi. Adequate social security measures.
vii. Worker’s participation in management.
viii. Recognition of their personality.
ix. Appreciation for good work and conduct.
x. Progressive and healthy personnel policies and conduct.
3. Responsibility to Consumers:
Some economists think that consumer is a king who directs the business enterprises to produce
goods and services to satisfy his wants. However, in the modern times this may not be strictly
true but the companies must acknowledge their responsibilities to protect their interests in
undertaking their productive activities.
Invoking the notion of social contract, the management expert Peter Drucker observes, “The
customer is the foundation of a business and keeps it in existence. He alone gives employment.
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To meet the wants and needs of a consumer, the society entrusts wealth-producing resources to
the business enterprise”. In view of above, the business enterprises should recognize the rights of
consumers and understand their needs and wants and produce goods or services accordingly.
The following responsibilities of business enterprises to consumers are worth mentioning:
1. They should supply goods or services to the consumers at reasonable prices and do not try to
exploit them by forming cartels. This is more relevant in case of business enterprises producing
essential goods such as life-saving drugs, vegetable oil and essential’ services such as electricity
supply and telephone services.
2. They should not supply to the consumers’ shoddy and unsafe products which may do harm to
them.
3. They should provide the consumers the required after-sales services.
4. They should not misinform the consumers through inappropriate and misleading advertise-
ments.
5. They should make arrangements for proper distribution system of their products so as to
ensure that black-marketing and profiteering by traders do not occur.
6. They should acknowledge the rights of consumers to be heard and take necessary measures to
redress their genuine grievances.
Despite the above responsibilities which are generally regarded as good marketing practices by
management experts the business enterprises in India generally do not pay heed to them and as a
result consumers are dissatisfied or disappointed in a large number of cases. There has been a
growing awareness of consumer rights.
The organized movement to protect consumer rights which is termed as consumerism has been
the result of the negligence of business enterprises to their responsibilities to consumers. Besides,
due to the indifferent attitude of business enterprises to consumer rights, Government has been
compelled to enact Consumer Protection Act to protect consumers’ rights and to prevent their
exploitation by the businesses.
4. Obligation towards the Environment:
The foremost responsibility of business enterprises is to ensure that they should not damage the
environment and for this purpose they should reduce as much as possible air and water pollution
by their productive activities. They should not dump their toxic waste products in rivers and
streams to avoid their pollution. Pollution of environment poses a great health hazard for the
people and is a cause of several respiratory and skin diseases.
In economic theory pollution of environment is regarded as social cost that must be minimized.
There is now a growing awareness towards reduction in environment pollution. According to the
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recent findings the climate change is occurring due to greater emission of carbon dioxide and
other pollutants.
Therefore, the corporate enterprises should adopt high standards of environmental protection and
ensure that they are implemented regardless of enforcement of any environment laws passed by
the government. Many countries including India have passed laws to protect the environment but
they are not properly and strictly enforced.
Business enterprises in their attempt to maximize profits recklessly and negligently pollute the
environment. Therefore, it is required that government should take tough measures and enforce
environment laws strictly if environment is to be protected.
5. Responsibility towards Government:
Government provides a number of infrastructure facilities and a conducive environment to
business organization for their proper functioning.
Therefore, the management of a business organization can also discharge its responsibility
towards the government in the following manner:
i. By abiding with all relevant government legislation;
ii. By maintaining fair trade policies and practices;
iii. By paying all duties and taxes due from it;
iv. By avoiding political favors; and
v. By not giving any bribe, etc., to any government official, etc.
6. Suppliers, Creditors and Others:
The functioning of a business enterprise is also affected by the suppliers, creditors and other
interest groups with whom the business has to interact. Hence, management owes a
responsibility towards such interest groups.
This can be performed in the following manner:
1. Prompt payment to suppliers.
2. Prompt payment of interest to lenders.
3. Furnishing of accurate information to creditors, financial institutions and suppliers.
4. Proper liaison with all interest groups.
Discharging of the responsibility towards suppliers and creditors, etc., boosts the public image of
the enterprise.
7. Responsibility to Society in General:
Business enterprises function by public consent with the basic objective of producing goods and
services to meet the needs of the society and provide employment to the people. The traditional

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view is that in performing this function businesses maximize profits or shareholders’ value and
doing so they do not behave in any socially irresponsible way.
In the present world where there are monopolies, oligopolies in product and factor markets and
also there are externalities, especially detrimental externalities such as environment pollution by
the activities of business enterprises maximization of private profits does not always lead to the
maximization of social benefit.
In fact in such imperfect market conditions, consumers are exploited by raising of prices much
above the cost of production, workers are exploited as they are not paid fair wages equal to the
value of their marginal product. Besides, there are harmful external effects to which are not
given due considerations by private enterprises in making their business decisions. Therefore,
there is urgent need to make business enterprises behave in a socially responsible manner and to
work for promoting social interests.
Business enterprises have a lot of responsibility to the society at large.
Some of them are mentioned below:
1. To take appropriate measures to reduce level of pollution and adopt eco-friendly technologies.
2. To generate sufficient employment opportunities so as to make good contribution to the
reduction of poverty in the country.
3. Respect the rights of workers and other employees and take appropriate measures to ensure
their safety and to improve their working conditions.
4. To provide quality healthcare to their employees.
5. To invest adequately in the research and development so as to make innovations to improve
their productivity.
5. Social Responsibility of Business: Need:
Are business owners supposed to work only for profit-making or they should also see to it that
different interest groups such as investors, consumers, employees, government and society are
also benefited from them? An aspect of social responsibility is that it is voluntary in nature
because some business persons may or may not choose to discharge their social obligations.
They may also choose to decide the extent to which they would prefer serving the interest
groups. However, if a business aims for all-round growth, there is no escape from assuming
social responsibilities.
In such a case, the following reasons have been laid down to explain the significance of
social responsibility for a business enterprise:

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1. Long-Term Interest:
It is in the long-term interest of the business to discharge its social obligations by serving
different interest groups such as employees, consumers, government and citizens. Wise business
persons know that unless they serve the society by fulfilling its needs, they will not be able to
climb the success ladder. Working for the society, stakeholders and government helps an
organization in establishing a strong public image. On the other hand, a business organization
with vested selfish interests may get ignored by the society.
2. Indebted to Society:
A business uses the resources of the society for its functioning. Hence, it becomes obligatory for
it to pay back its dues by serving the society. Businessmen should tend to the needs of the
society and use its resources for community welfare. This practice ultimately helps the
organization in establishing itself on the strong foundation of a pleased society and a cooperative
labor force.
3. Social Power:
Business persons are endowed with a lot of social power. They have the potential to change the
destiny of the population by collectively deciding for the country on crucial issues such as rate of
economic progress, distribution of income among different income groups etc. Ideally, business
persons should take up social responsibilities in proportion to their social power.
If the business enterprise misuses its social powers for selfish motives, the society can intervene
via government controls and other laws. Therefore, it is morally right for a business to embrace
its social obligations and discharge them loyally.
4. Public Image:
A business devoted towards fulfilling its social responsibilities is regarded highly by the society.
Good rapport with employees, suppliers, customers and government helps in building a favorable
public image of the business enterprise. Moreover, a socially responsible organization is
considered trustworthy by the shareholders and investors.
5. Social Awareness:
These days, employees and customers are more informed about their rights. While consumers
expect the seller to abide by the fair trade practices, workers want fair wages and other employee
benefits. If the expectations of these interest groups are not met, they may resort to either anti-
social activities or seek help from trade unions and consumer courts. This will lead to industrial
turmoil and unrest within the society which is harmful for proper functioning of the business.

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6. To Avoid Government Intervention:
If a business organization fails to acknowledge and perform its social duties, it is bound to lose
its freedom and flexibility in the long-run. The Consumer Protection Act and other legislations
passed by the government safeguard the interest of the customers against business persons
indulging in black-marketing, adulteration, hoarding and many other illegal trade practices.
Since, government intervention is not welcomed by business enterprises, social duties should be
voluntarily carried out by all the organizations to avoid such situations.
7. Law and Order:
A peaceful society is congenial to the expansion of business. Unable to withstand exploitation by
the business enterprises, the weaker sections can rebel and take the law and order in their hands.
As a result, the survival of the business can be threatened.
8. Moral Justification:
A business possesses resources such as finance and talent pool to help bail out troubled masses
out of social issues like poverty, dowry, unemployment and illiteracy by organizing special
campaigns and programs. Additionally, business houses can assist the government in solving
many other issues like lack of foreign exchange etc. Moreover, business organizations increase
pollution by releasing untreated sewage into the environment. Thus, it is a moral obligation of
the business to render its services in tackling these issues.
9. Socio-Cultural Norms:
India has a rich legacy of business values passed down by the legendary and morally upright
business owners like Ratan Tata, Azim Premji, etc. Only those business persons who sincerely
abide by the canon of business will get the privilege of being honored by the citizens and the
government. Hence, the business should aim to promote equal opportunity and maintain healthy
inter-personal relations with all the stakeholders such as customers, employees to carve a niche
for itself as a honest enterprise.
10. Trusteeship:
The great socio-political leader Mahatma Gandhi propounded the philosophy that owners of
wealth and property should hold and use the wealth for the welfare of the society. Therefore,
company owners should operate the business not only for their own benefit, but also for the
prosperity of the society. According to Keith Davis, since business has the resources to resolve
the mounting social problems, it should try and assume the social responsibilities.
6. Social Responsibility of Business: Concept:
Every business must conduct its operations so as to produce an overall positive impact on
society. Corporate social responsibility (CSR) requires every business to behave ethically and
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improve the quality of life of society. Every business must decide voluntarily to contribute to a
better society and a cleaner environment. CSR is a concept that strikes a happy balance between
economic, social, ethical and societal concerns of a business. It forces every business to conduct
the show in the best interests of society.
The essential elements of CSR may be presented thus:
i. CSR is a moral obligation to conduct operations ethically
ii. It strikes a happy balance between economic, ethical and social issues
iii. It demands every business to conduct the show in the best interests of society at large
iv. Businesses must make profits, but that cannot be at the cost of customers.
v. It is a voluntary effort undertaken by every business that goes beyond what has been dictated
by law.
vi. It is, in short, a company’s sense of responsibility towards the community and environment in
which it operates. Now-a-days, the term is extended to include philanthropy (love of humanity)
and volunteering (actions undertaken without seeking any gain).
7. Social Responsibility of Business: Perspectives:
Historical Perspectives of Social Responsibility:
Expectations of society from business firms as regards corporate social responsibility have
gone through three phases:
1. Profit Maximization:
Historically, public viewed business enterprises as institutions which mainly looked after the
interests of their owners. Social responsibility was discharged to the extent of maximizing profits
within the legal framework of the country.
2. Trusteeship Management:
During later years, the concept of social responsibility widened from mere satisfaction of
owners’ interest to interests of other stakeholders also, like employees, consumers, creditors etc.
Providing good working conditions, goods of the right quality and quantity, timely repayment of
loans to creditors etc., were viewed as essential aspects of social responsibility. Business
managers were trustees of business property, holding it in trust for the welfare of society.
3. Quality of Life Management:
A still wider perspective of social responsibility developed in 1960s. It viewed business
enterprises as institutions to remove social ills and uplift the society. Business managers were
supposed to change the quality of society.
8. Barriers to Social Responsibility:
Social responsibility is affected by the following barriers:
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1. Managerial Perceptions:
If employees of the organization want to assume social responsibility, their superiors may not
allow them to do so. In such situations, they may be forced to choose between personal growth
(and through it, organizational growth) and social growth. The inevitable choice is personal
growth even if it is at the cost of social values.
2. Comparison of Divisional Performance:
Overall performance of the organization is judged by the performance of its various departments.
A department which discharges social responsibility may report lower profits than its
counterparts. This may not be acceptable to top managers unless the social programs are
approved by them.
3. Overall Organizational Barriers:
Low profits on account of social responsibility may not be acceptable to owners (shareholders)
or employees of the organization if they lower dividends or wages. Catering to values of one
section of society at the cost of another is not justified.
4. International Barriers:
If a multinational corporation is buying supplies from the home industry and domestic
companies are selling their supplies at a higher price (because of social costs) vis-a-vis other
countries, they may lose sales in the international market. International business may, thus, be a
barrier to social responsiveness of business enterprises.
In view of the above discussion, it is advisable for business enterprises to take up social only if
their benefits are more than the costs.
9. Voluntary Guidelines for Corporate Social Responsibility
The CSR Policy should normally cover following core elements:
1. Care for All Stakeholders:
The companies should respect the interests of, and be responsive towards all stakeholders,
including shareholders, employees, customers, suppliers, project affected people, society at large
etc. and create value for all of them. They should develop mechanism to actively engage with all
stakeholders, inform them of inherent risks and mitigate them where they occur.
2. Ethical Functioning:
Their governance systems should be underpinned by Ethics, Transparency and Accountability.
They should not engage in business practices that are abusive, unfair, corrupt or anti-competitive.
3. Respect for Workers’ Rights and Welfare:
Companies should provide a workplace environment that is safe, hygienic and humane and
which upholds the dignity of employees. They should provide all employees with access to
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training and development of necessary skills for career advancement, on an equal and non-
discriminatory basis.
They should uphold the freedom of association and the effective recognition of the right to
collective bargaining of labor, have an effective grievance redressal system, should not employ
child or forced labor and provide and maintain equality of opportunities without any
discrimination on any grounds in recruitment and during employment.
4. Respect for Human Rights:
Companies should respect human rights for all and avoid complicity with human rights abuses
by them or by third party.
5. Respect for Environment:
Companies should take measures to check and prevent pollution; recycle, manage and reduce
waste, should manage natural resources in a sustainable manner and ensure optimal use of
resources like land and water, should proactively respond to the challenges of climate change by
adopting cleaner production methods, promoting efficient use of energy and environment
friendly technologies.
6. Activities for Social and Inclusive Development:
Depending upon their core competency and business interest, companies should undertake
activities for economic and social development of communities and geographical areas,
particularly in the vicinity of their operations. These could include – education, skill building for
livelihood of people, health, cultural and social welfare etc., particularly targeting at
disadvantaged sections of society.

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