READING GUIDE FOR BUSINESS ETHICS

Models and Framework of Social Responsibility

▪ Social Responsibility
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 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.

✓ Stockholder or Shareholder Theory

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 if
their practices conform with the law. 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.

Criticism of the Stockholder Theory

Case Study: Fraud

Enron Corporation was once a giant American energy, commodities, and services company that
employed over 20,000 people. However, by the end of 2001, it was discovered that it had engaged
in accounting fraud, lying about its profits, and concealing debts so that they did not show up in
the company's accounts. The company become a very real and well-known example of corporate
fraud and corruption.

Note: Watch How Did Enron Make Their Money, Hide Their Finances, Fail, and Get Caught? Financial reporting (2004)
by The Film Archives.

-- Enron applied accounting practices that falsely inflated the company’s revenue, to mention
overstating the revenue and hiding the debts using special purpose entities. Its financial position
report was also disclosed to the public, which was also incorrect.

✓ Invisible Hand Theory

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 interest. 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

Choa and Parma, (2016). Essentials in business ethics. Brilliant Creations Publishing, Inc.
 READING GUIDE FOR BUSINESS ETHICS
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 sales, and hurt the bottom line.

✓ Stakeholder Theory
The Stakeholder Theory is a 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 can align the stakeholder’s interests with its 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: employees,
suppliers, regulators, financiers, competitors, customers, media, and society.

Case Study: Supplier Relations

Jollibee, through the Jollibee Group Foundation, Inc, has launched a farmer Entrepreneurship
Program (FEP). In this program, small farmers are given a chance to directly supply their producers
to big fast-food restaurants, supermarkets, and food processors. Farmers are given the training
they need to increase productivity, as well as gain skills in managing an agri-business. They are
taught the value of meeting deadlines and maintaining the good quality of their products. They
are also linked to partner financial institutions to help farmers get access to credit. This set-up in
turn helps Jollibee cut the distributor and have better access and control of its needed food
suppliers. To date, over 1 000 farmers have been helped by the FEP by linking their crops directly
to institutional markets.

Choa and Parma, (2016). Essentials in business ethics. Brilliant Creations Publishing, Inc.