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RESPONSIBLE BUSINESS

• Companies are coming under pressure for


better environment performance.

• 90% of the consumers in the U.K considered


“green” issues in relation to their consumption.

• Membership of the largest green groups grew


over 5 million and have a staff of 1500.
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• Concerns over pollution and over-population led to
the arising of the modern green movement.
• From 1980s onwards a series of ecological
disasters:

 Emission at the Union Carbide plant at Bhopal


 Chernobyl nuclear reactor in the USSR
 Exxon Valdez oil spills in Alaska
 Torching of the Kuwaiti oil fields at the end of Iraqi invasion

reawakened public concern and fears about


environment dangers
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• Scientific progress has also increased the


“green consciousness”
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The Business Response

1) Green products- Companies using


ecological friendliness as a marketing
tool. (CFC free goods)
2) Changed practices- Bad publicity has
actually led to improvements. (tuna fish)
3) Limits- there is a limit to which consumer
are going to change their life style.
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The Business Response….cntd

• Environmental impact assessment-


Companies review not just the finished
product but their production process too.
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Types of Impact
There can be two types of effects of ecological
concerns on business.

1) Direct Impact
2) Indirect impact
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1) Direct Impacts
(b) They can affect costs or the availability of
resources (mining in natural areas)
(c) They can effect consumer demand (Shell)
(d) They effect power balances between
competitors in a market
(e) Legislative change may affect the frame
work within which businesses operate.
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2) Indirect Impacts

Indirect impacts may manifest themselves


in, for example, pressure form suppliers or
staff as a consequence of concern over
ecological problems.
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Issues relevant to business
Among the ecological issues, that are relevant
to business, are the following.
1)Resource Depletion:
Resource depletion may influence operations
through impacts on the availability of raw
material through damage to soil, water, trees,
plant life, energy availability, mineral wealth,
animal and marine species.
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2)Genetic Diversity:
 More relevant to pharmaceutical firms, firms
in bio-technology, the agriculture and food
industry.
 Development of many new strains of plants
and new types of medicine depend on the
availability of wild species from which genetic
resources can be drawn.
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 Opposition to genetically modified food is


growing.

 Production of organically-produced food is


becoming more profitable as consumer
are willing to pay a higher price.
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3) Pollution Concerns:
Pollution concerns are at the centre of the most
worries about the environment.
(a) Businesses are under pressure to curtail
the impacts of their activities on the water
tables, seas and the oceans. Concern over
the quality of drinking water in U.K.
has generated a massive increase in the size
of the bottled water market in the U.K.
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(b) The quality of air has been much discussed.

(c) Concern about the pollution of land and the


long term damage wrought by industry to the
land it occupies, is an other important issue.

(d) Noise pollution is also likely to become


important and can impact the operation of all
manner of business.
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In order to take action to remedy these problems
the “Polluter pays principle” was adopted by the
OECD in early 1970s and now it has broad
acceptance.

Pap aims to relate the damage done by


pollution involved in the production of goods
and services to the prices of these goods.
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The intention is to deter potential polluters by
making it uneconomic to produce goods and
services that create pollution. This principle has
been broadly accepted and has been a major
factor. In reaction to major pollution incidents
such as large scale oil and chemical spills.
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4) Acid rains:
Damaged forests throughout northern Europe
and acidification of water supplies and fish-
bearing lakes and rivers.
Not possible to establish direct culpability
(Swedish farmers)
Bills involved are large and political pressure
to constrain the effects of industrial production
have increased enormously.
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5) Ozone depletion:
 Ozone layer has been depleted because
of pollution
 Some solvents used in electronics industry
and coolants in refrigerators are a threat to
the ozone layer.
These are being banned now.
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6) Waste:
Example include nuclear waste from power
stations, industrial waste and domestic
waste.
National governments are doing legislation
to handle the waste.
There are also international agreements
about the effects of dumping waste on the
marine life and on beaches.
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7) Climatic Change:
Excess of CO2 in the air can produce “un
natural weather”.

Consequences include average world


temperature and sea level rising. Disastrous
for agriculture and low lying areas.

The Kyoto Treaty of 1997 was an attempt


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to control pollution of the environment by
emission of the “greenhouse gases” such as
Chlorofluorocarbons (CFCs) which can cause
potentially damaging weather.
Treaty binds industrial nations to reduce
emissions by an average of 5.2% below 1990
level over the next decade. USA withdrew
from the treaty in March 2001.
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8) Energy Resources:
There are concerns about the usage of
energy resources.
Some energy resources are yielding far
less of their potential than possible. For
example, coal.
Energy saving programs are underway in
most of the developing countries.
RESPONSIBLE BUSINESS

New energy efficient products are being


developed.
Legislations is required to limit the use of
certain scarce and dangerous resources.
A “carbon tax”, for example can help.
SOCIAL RESPONSIBILITY
OF ORGANIZATIONS

Social responsibility is expected from all


organizations, be they businesses,
governments, universities and colleges, or
religious institutions.
SOCIAL RESPONSIBILITY
SOCIAL RESPONSIBILITY OF BUSINESS

One school of thought argues that management


of a business has only one social responsibility
and that is to maximize wealth for its share
holders.

There are two reasons given to support this


view.
SOCIAL RESPONSIBILITY
1) Businesses is owned by shareholders so it is
their right that they be given maximum
return and revenue should not be wasted
on other activities.

2) Management’s job is to maximize wealth,


as this is the best way that society can
benefit from a business activity.
SOCIAL RESPONSIBILITY
HOW ????
• It will increase tax revenue.

• Increased wealth may have the “trickle


down” effect.

• Many companies share are owned by


pension funds whose ultimate beneficiaries
may not be wealthy persons.
SOCIAL RESPONSIBILITY
An other school of thought argues that the aim
of the business is not only to maximize wealth
( to make money) but it is also binding upon
them to give something back to society; so their
business should be “RESOPONSIBLE
BUSINESS”.
This school supports its view by giving some
arguments.
SOCIAL RESPONSIBILITY
1) In practice organizations are rarely
controlled effectively by shareholders.
Most share holders are passive investors.

2) Large corporations can manipulate markets.


Social responsibility, forced or voluntary is a
way of recognizing this.

3) Businesses do receive a lot of government


support. The public pays for infrastructure.
SOCIAL RESPONSIBILITY

Businesses pay tax but public pays through


higher prices.

4) There are dire social consequences of the


activities of the firms ( increased traffic,
pollution, stress) which are inflicted on the
wider population.
SOCIAL RESPONSIBILITY

The arguments for and against the social


responsibility of organizations although complex
can be traced to different assumptions about the
society and the relationships between the
individuals and organizations within it.
SOCIAL RESPONSIBILITY

If the stakeholder concept of business is held


then “the public” is also a stake holder.

Business will only succeed if it is part


of a wider society. Giving to charity is one
way of encouraging a relationship.
SOCIAL RESPONSIBILITY

Charitable donations and artistic sponsorships


are a useful medium of public relations and
can reflect well on business. It is just like an
other form of promotion which can enhance
consumer awareness of the business. ( Its an
investment)
SOCIAL RESPONSIBILITY
A very strong argument for social
responsibility
is “Market Failure”.

Market failure refers to a situation in which a


free market mechanism fails to produce the
most efficient allocation of resources.
SOCIAL RESPONSIBILITY
Private cost- cost to the firm of resources used

Social cost- cost to the society as a whole, of


resources used by a firm

Private benefit- benefits obtained directly by a


consumer or a producer

Social benefit- total benefits obtained directly or


indirectly by suppliers & consumers
SOCIAL RESPONSIBILITY
The principal causes of market failure are
considered below.

(a) Imperfections in the market


(b) Divergence between private costs and
social costs.
(c) The existence of public goods.
(d) The need to consider non-market goals,
such as “social justice”
SOCIAL RESPONSIBILITY
(a) Imperfections in the world

• Factories causing pollution don’t have to


compensate nearby residents for the cost of
cleaning their buildings.
• Employers don’t have to pay for work practices
which leave their workers feeling unfulfilled,
stressed and pressured.
• Car manufacturers don’t have to pay for the
cost of road congestion which results from
the sale of more cars.
SOCIAL RESPONSIBILITY
(b) Social costs and private costs
In a free market, producers
and consumers make output and buying decisions
for their own private benefit and these decisions
determine how the economy’s resources will be
allocated to production and consumption. Private
and social costs determine what goods are made &
bought in a free market.
SOCIAL RESPONSIBILITY
When private & social costs or private & social
benefits are not the same, such an allocation of
resources will occur that will be not socially
acceptable to the society.

Private cost not equal to social cost


1) Emission of pollution during production-private
cost not equal to social cost.
2) A firm produces a good -private cost not equal
to social cost.
SOCIAL RESPONSIBILITY
Private benefit not equal to social benefit
• Musicians being hired at a local
restaurant. (private benefit not equal to
social benefit)

• Employees sent on training by a firm-


(private benefit not equal to social benefit)
SOCIAL RESPONSIBILITY
(C) Public goods
The production of such goods are
provided by the state. Every one can use public
goods. Its available for every one and it is almost
impossible to exclude anyone from its use.

In a free market individuals benefiting from public


goods will have no incentive paying for them. They
might as well be “free riders”, while other continue
to pay for it.
SOCIAL RESPONSIBILITY
(d) Social Justice
The firm makes money by
doing business in the society. Its part of
the society and not an alien entity. Its only
fair that the business pays something back
to the society with out whom it can’t exist.
SOCIAL RESPONSIBILITY
The existence of market failure and externalities
suggest the need for intervention by the
government , in order to improve the allocation
of resources

Merit and demerit goods


Merit goods are considered to be
worth providing in greater volume than needed in
the market because of its long term public interest.
Education is one example.
SOCIAL RESPONSIBILITY

Demerit goods are those goods that government


want to see consumed less because of its
harmful long term effects for the society.

Examples include tobacco.