Student number: (25070)9100
Corporate Social Responsibility Analysis
Corporate social responsibility is a significant temporary topic in society. How we
define it and what criteria are going to be used will highly affect the welfare of whole
society. Philosophies have come up 3 frameworks, the shareholder model, the
stakeholder model, and the market failure model, trying to offer a most satisfactory
answer to what is the social responsibility of a corporation.
However, Shareholder model fatally neglects the relationship between
manager and stakeholders (except shareholders), the power of government
intervention, and the moral constraints on how a corporation maximizes its profit. On
the other hand, Stakeholder model also has some problems on whether a manager
has multiple-fiduciary relationships with all the stakeholders (from a narrow
definition), how to balance the conflicting interests between stakeholders, and how
to deal with the relationship with rivals in a competitor market. Therefore,
shareholder and stakeholder model may cause a serious dead weight lost of a society
in real market activities. They fail to reach a pragmatic corporate social responsibility
compared to the market failure model.
I will argue that the most satisfactory articulation of a corporation’s social
responsibility is to maximize its profit and subject to both legal and moral constraints
(Heath, P125).This idea is supported by the market failure model. In the rest of this
article, I will show how market failure model realizes this responsibility and how
shareholder and stakeholder model fail to reach that conclusion. Market Failure Model (By Joseph Heath)
Joseph Heath argues that a market failure represents that the market fail to produce
the most efficient output (or we say a Pareto-efficient outcome), and to maintain a
most rational price level (Heath, P123). A Pareto-efficient outcome is a situation that
society cannot make a better move until it makes one group better-off while making
other groups much worse-off (Heath, P123). In order to correcting market failure and
get closed to a Pareto-efficient situation, government and corporation should both
make some effort.
Market failure model argues that government should formulate a set of market
rules such like discouraging hostile takeover police through regulations. Moreover,
providing amenities by building public goods such as railroad is also necessary.
Government doing so is to offer a normative market with absence of externalities,
symmetric information in transactions, mature insurance institutions, and all factors
that make competitions generate an efficient allocation of goods and services.
(Heath, P123) However, it is very hard for government to correct market failure
sufficiently, as Health argued, because there are great administrative costs of getting
the information. This cost is even bigger than the gain of making up the dead weight
lost through use litigation. This will make the situation even worse. (Heath, P124)
Therefore, corporations need to take some responsibilities to make up the blunt of
government intervention by operating under some moral constraints.
On corporation aspect, Heath agreed with Friedman that it is no problem for
corporation to pursue profit maximization, because it contributes in maintaining a healthy price system. (Heath, P123) However, what matters is that a corporation
should seek profit only under the preferred strategies like improving after-sale
service, devising more efficient production line, and investing money on new product
creation. However, in practical world, a law that prohibits all non-preferred strategy
such as bluffing and pollution is impossible to establish. Moreover, non-preferred
strategies cause market failure. Therefore, according to Heath, an ethical firm should
obey the moral constraints of avoiding non-preferred strategies when seeking profit,
even if these non-preferred strategies are legally permissive (Heath, P124).
On the other hand, Heath also pays attention to the intrafirm business ethics,
which include the obligation of manager towards shareholder and other stakeholders.
Heath argues that manager has a fiduciary obligation towards shareholder as their
agent (Heath agrees with Friedman’s shareholder model on this issue) (Heath, P123).
According to this fiduciary obligation, a manger should seek interest for the
shareholders beyond her interest, even though managers do not have a contract
forcing them to. On the other hand, the relationship between manager and other
stakeholder is moral obligation. As I discussed before, in a Pareto-efficient situation,
it is immoral for a manager to make his or her employees or suppliers much worse
off in order to benefit the shareholders, because that will cause a market failure.
Market failure model is useful in the real market because it adds some specific
moral constraints on corporations’ daily conduct of seeking profits. These constraints
make up the incompleteness of government intervention and regulation. Under
these constraints, corporations can maximize their profit to sustain a sound price system and push the whole market to produce a Pareto-efficient outcome.
Shareholder Model (By Milton Friedman)
Friedman claims that a manager is the agent for the shareholder. Therefore she has a
fiduciary obligation to sense interest for the shareholders’ principle. (Friedman, P65)
Heath agrees on this point. However, shareholder model neglects the moral
relationship between manager and other stakeholders like clients and employees.
For example, according to Friedman, a manger cannot increase the employee’s salary
when there is bad inflation in order to maintain the interest for his or her
shareholders, because he or she has no right to use the shareholders’ principle.
(Friedman, P67) However, in this case, the manager is seeking interest for
shareholders while making employees much worse off. As a result, it undermines the
Pareto-efficient outcome and creates a market failure.
On the other hand, Friedman argues that ideally government and corporations