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nderstonding The Social l esponslbilitFI

Puzzle
What Does The Businessman Owe to Society?

K E I T H DAVIS

In our pluralistic society, business is influenced by all other groups in the system, and business in turn, influences them. Therefore, the businessman must be socially responsible for his actions. Mr. Davis explains why such responsibility has had recent emphasis. Not only are the parts of modern society more interdependent, but the social sciences are giving us new knowledge about how business affects the other parts. Also, in modern business, with ownership and control separated, managerial responsibility must be identified and directed. The power-responsibility equation (social responsibilities of businessmen arise from the amount a[ social power they have) clarifies managerial obligations. Business, in the long run, to maintain its position of power, must accept its responsibility to the whole of society.

responsibility? One observer says, "A businessman has no responsibility to the public except to sell at as low a price as he can." Another says, "The job of business is to make a profit, and as long as it stays within the limits of the law, it has no other responsibility." At another extreme a local activist charges, "Business materialism and unemployment are the main causes of juvenile delinquency, and business must give a job
Mr. Davis is a professor of management, Arizona State University.

H know what to do in the area of social

ow does a modern business manager

to every teen-ager in order to prevent delinquency." And a local humanist thinks that business should pay for a new hospital because, "Business can get the money, but we can't afford to raise our taxes anymore." In the face "of all these claims, what guides does a manager have to assist him in making judgments concerning social responsibility? Should he avoid involvement in his community? Should he pay attention only to the loudest claimant, or to each squeaky" wheel? Should he support only those activities in which he has a personal interest? Certainly he knows that, regardless of the claims made upon him, he cannot solve all of society's problems. If he tried to do so, he would preempt the work of those institutions that deal specifically with social problems. Furthermore, his resources are limited; he must husband them wisely and put them to the best long-run use. But how should he respond to these different claims on his organization? Discussions about social responsibility have reached a high pitch in recent years, and I predict that interest will continue at a high level because the social system is undergoing changes that require new modes of conduct. Both fad and fetish have developed around this interest in social responsibility. The public press abounds with pious statements of its existence, but there seems to be considerable confusion about

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why it exists, how it arises, and how important it is for business and other organizations in our society. The following comments will consider these issues and, hopefully, shed some light on them. I will examine social responsibility in terms of a fundamental model that fits together many of the loose pieces in the social responsibility puzzle. Although my basic model substantially applies to any organization, including unions, government, cooperatives, and newspapers, this discussion is within the context of a business organization.

build societal values into his actions, even when they are for a certain organization. This is the essence of social responsibility. For the manager it means realizing that the business system does not exist alone and that a healthy business system cannot exist within a sick society.

THE G R O W I N G EMPHASIS

WHAT IS SOCIAL RESPONSIBILITY? The substance of social responsibility arises from concern for the ethical consequences of one's acts as they might affect the interests of others. This idea exists in most religions and philosophies of the world. Quite frequently, however, a tendency exists to limit its application to person-to-person contacts. Social responsibility moves one large step further by emphasizing institutional actions and their effect on the whole social system. Without this additional step, personal and institutional acts tend to be divorced. A businessman can lead a model personal life, but continue to justify his organization's pollution of a river because no direct personal consequence is involved. He can consider river pollution a "public problem" to be solved by public action. The idea of social responsibility, however, requires him to consider his acts in terms of a whole social system and holds him responsible for the effects of his acts anywhere in that system. Social responsibility, therefore, broadens a person's view to the total social system. When a man's primary frame of reference is himself, he may be counted upon for antisocial behavior whenever his values conflict with those of society. If his values are limited primarily to a certain group or organization, he tends to become a partisan acting for that group. But, if he thinks in terms of a whole system, he begins to

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Actions for the benefit of a private organization may also be socially responsible; to require that all acts be only in the public interest, compared with both public and private interests, is to deny the pluralism of society. Centers of initiative are many in a free society, and in order to maintain these centers, their goals must be served, as well as the general welfare. But the price that society exacts for this pluralism is that private organizational acts be made with concern for their public effects. A pluralistic society, therefore, is a social system in which diverse groups maintain autonomous participation and influence in the social system; it connotes a concurrent private freedom and public responsibility. Pluralism-and the private freedom from which it arises-is a basic cause of our growing interest in social responsibility. Pluralism is a basic reality in modern business culture. Business is influenced by all other groups in the system, and it, in turn, influences them. Eells and Walton have observed, "Pluralism always implies multiplicity, frequently diversity, and sometimes conflict. It is as much the generator as the result of freedom . . . . . It is... as much opposed to the ambitious pretenees of a James~Stuart (the king can do no wrong), as it is to the Rousseanian version of democracy (the collectivity can do no wrong). ''1 The fact that pluralism diffuses power 1 Richard Eells and Clarence C. Walton, Conceptual Foundations of Business (Homewood, Ill.: Richard D. Irwin, Inc., 1961), pp. 360 and 363.

BUSINESS I-IORIZONS

SOCIAL RESPONSIBILITY PUZZLE

suggests that progress is made through responsible negotiation and compromise among power centers. There is neither monolithic decision making by one organization nor pure democracy of the masses operating free of organizational constraints. Many power centers exist in pluralism--none completely independent, but each with some autonomy. Pluralism also implies that business is a joint venture of responsible citizens and groups of citizens, such as investors, managers, workers, communities, scientists, and others. Together these groups offer diverse inputs and expect diverse outputs. Viewed as a whole, the outputs are more than economic; social, psychological, political, and other outputs are also expected. This joint venture involving many groups is not necessarily a conflict or struggle for absolute power. Rather, it represents the efforts of people to reconcile their needs through a variety of organizational interests. In pluralism, the business institution, therefore, becomes responsible to a variety of claimant groups in a variety of ways, rather than being responsible only to stockholders, and these claimants in turn have responsibilities to business because of their power to affect it. We can thus conclude that pluralism in modern society is increasing our interest in social responsibility because it multiplies the centers of social power, all of which need to be concerned with social responsibility as they relate to each other in the social system. Pluralism is a major consideration in solving the social responsibility dilemma.
O T H E R REASONS

However, several other reasons exist for the recent emphasis on social responsibility. The first reason is that modern society is more complex, with each of its parts more dependent on other parts. A new social dependency is evident. A century ago the acts of a businessman in India were of little significance to the United States; today with the world tied together in technology, communication, and politics, and with U.S. firms op-

erating in India, business developments in that country are significant to a U.S. firm. A second reason is that society has more wealth and culture that it wishes to conserve. Therefore, it is less willing to risk the disruptions that might occur from irresponsible act in our society, such as sale of dangerous drugs, nationwide transportation strikes, or stream pollution. The climate of public opinion increasingly insists that actions by all institutions and persons must be responsible. Too much is at stake to risk irresponsibility, so responsible business action becomes necessary in order to maintain a favorable public image. A third reason for interest in social responsibility is that the social sciences are giving us new knowledge about how business affects the social system beyond the company gates. Though we have always known t h a t business affects the social system, we were not sure how, so we were not able to offer many proposals for improving its social function. We had to wait for more knowledge of the business mission in society. Even when we did have an idea for improved responsibility, we tended to accept Adam Smith's model of pure competition in which business was bound by the fetters of competition and really could not .take any actions for the public good except to sell at the lowest possible price. Today, however, we recognize that business has more flexibility for responsible action because it no longer lives in pure competition, and the rules of pure competition do not apply. Fourth, the growing power of government looms on the sidelines waiting to add restrictive controls the moment business becomes lax in any area of responsibility. Businessmen have learned that once a government control is established, it is seldom removed even though conditions change. When freedom and initiative are lost to government, they are lost for the long run. If these are the facts, then the prudent course for business is tO understand fully the limits of its power and to use that power responsibly, giving government no cause to intervene.

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A fifth reason for our increasing emphasis on social responsibility is that current ethical concepts are programming people to favor more responsible action. The businessman shares the attitudes and values of society just as he did a century ago and reflects today's attitudes of more responsible conduct in his actions. Finally, and perhaps most important, ownership and control are more and more separated in modern business. The career manager takes the longer view over time and the broader view among claimants on the organization. The separation of owner and manager has not been required by law but has developed de facto by delegation because this arrangement worked best. Unfortunately, this arrangement also obscures the location of responsibility. When the owner managed, the acts of the firm proceeded from his initiative, and the identity and power of the firm resided in him. In this situation, both the law and the people of the community could directly fix responsibility without confusion. But with the separation of ownership and management, normal legal channels of responsibility have eroded. No one is sure how much public responsibility managers have or through what channels it is controlled. One concept, however, makes managerial responsibility clear: the powerresponsibility equation.
HOW MUCH RESPONSIBILITY?
THE POWER-RESPONSIBILITY EQUATION

and sales of over $10 billion in 1963. The annual sales of General Motors Corporation were greater than the gross national product of the Netherlands! ~ In many ways businessmen speak for the important institution we call "business." They speak for or against legislation, economic policy, labor relations policy, and so on in their roles as businessmen. To the extent that businessmen-or any other gronphave social power, the lessons of history suggest that social responsibility of an equal amount arises therefrom. Stated in the form of a general relationship, social responsibili-

ties of businessmen arise from the amount of social power they have.
The idea that responsibility and power go hand in hand appears to be as old as civilization itself. Wherever one looks in ancient and medieval history-Palestine, Rome, Britain-men were concerned with balancing power and responsibility. Men have often failed to achieve this balance, but they have generally sought it as a necessary antecedent to justice, This idea has its origins in reason and logic. It is essentially a matter of balancing the two sides of an equation. As stated by one philosopher, "The demand of the law in a well-ordered society is that responsibility shall lie where the power of decision lies. Where that demand is met, men have a legal order; where it is not, they have only the illusion of one. "3 The idea of equal power and responsibility is not a stranger to business either. For example, one of the rules of scientific management is that authority and responsibility should be balanced in sucha way that each employee and manager is made responsible to the extent of his authority, and vice versa. Although this rule refers only to rel~tionships within the firm, it should apply as well to the larger society outside the firm. As a matter of fact, businessmen have been strong proponents of balanced social power
2 "The 500 Largest U.S. Industrial Corporations,"
Fortune (July, 1964), pp. 179-98.

Most persons agree that businessmen today have considerable social power. Their counsel is sought by government, and what they say and do influences their community. Social power comes to businessmen because they are leaders, are intelligent men of affairs, and command vast economic resources. The assets of the Bell Telephone System, for example, were about $30 billion in 1963, making it the largest business in the world. Among manufacturers, General Motors and Standard Oil of New Jersey had both assets

8 John F. A. Taylor, "Is the Corporation Above the Law?" Harvard Business Review (March-April, 1965), p. 126.

BUSINESS HORIZONS

SOCIALRESPONSIBILITYPUZZLE

and responsibility in external society, particularly in their views on responsibilities of labor leaders. The logic of reasonably balanced power and responsibility is often overlooked by those who discuss social responsibility. Some argue that business is business and anything that smacks of social responsibility is out-ofbounds. Milton Friedman contends that "few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. "4 Another author speaks of the "frightening spectacle" of a powerful business group that in the name of social responsibility "imposes its narrow ideas about a broad spectrum of unrelated noneconornic subjects on the mass of man and society. "5 He advocates a powerful democratic state to look after general welfare, leaving business to pursue its main objective of material gains within limits of everyday civility. The objections to social responsibility are meaningful. Indeed, many dangers await as business moves into untrodden areas of social responsibility. The fallacy of these objections is that they are usually based on an economic model of pure competition in which market forces leave business theoretically without any social power and, hence, no responsibility (a balanced zero equation ). This zero equation of no power and no responsibility is a proper theoretical model for pure competition, but it is theory only and is inconsistent with the power realities of modern organizations. They possess such great initiative, economic assets, and power that their actions do have social effects. In reality, therefore, the "no responsibility" doctrine assumes that business will keep some of its social power but will not worry about social responsibility. At the other extreme, some persons would
*Milton Friedman, Capitalism and Freedom (Chicago, Ill.: University of Chicago Press, 1962), p. 133. Theodore Levitt, "The Dangers of Social Responsibility," Harvard Business Review (SeptemberOctober, 1958), p. 44.

have business assume responsibilities as a sort of social godfather, looking after widows, orphans, public health, juvenile delinquency, or any other social need, simply because business has large economic resources. This position overlooks the fact that business operates in a pluralistic society, which has other institutions available to serve people in these areas. Business is one of many centers of initiative in the social system; hence, no need exists t o make it a monolithic dispenser of welfare, overshadowing the state as it cares for everyone's problems. The "total responsibility" doctrine also confuses business's function of service to society with servitude to society. Workers, investors, and others participate in a business as free m e n - n o t as slaves of society. They have their own lives to live, and business is their cooperative venture for fulfilling their own needs (private needs) while serving others (public needs ). The "no responsibility" and the "total responsibility" doctrines are equally false. According to the first doctrine, business keeps its power but accepts no responsibility, thereby unbalancing the powerresponsibility equation. According to the second doctrine, responsibility far exceeds power, again unbalancing the equation.
THE IRON LAW OF RESPONSIBILITY

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If business social responsibilities could be avoided or reduced to insignificance, business would be released from a heavy burden, Social responsibilities are difficult to determine and apply. Their relationships are complex. If the complexities of social responsibility could be avoided, business decisions would certainly be easier to make. But what are the consequences of responsibility avoidance? If responsibility arises from power, then the two conditions tend to stay in balance over the long run, and the avoidance of social responsibility leads to gradual erosion of social power. This is the Iron Law of Responsibility: Those who do not take responsibility for their power, ultimately shall lose it. 6 Its long-run application to man's institu-

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tions certainly stands confirmed by history, though the "long run" may require decades or even centuries in some instances. As it applies to business, the Iron Law of Responsibility insists that to the extent businessmen do not accept social-responsibility obligations as they arise, other groups eventually will step in to assume those responsibilities. This predietion of diluted social power is not a normative statement of what I think should happen. Rather, it is a prediction of what will tend to happen whenever businessmen do not keep their social responsibilities approximately equal to their social power. An early study of business social responsibilities presented this idea as follows, "And it is becoming increasingly obvious that a freedom of choice and delegation of power such as businessmen exercise would hardly be permitted to continue without some assumption of social resporrsibility."7 History supports the mutuality of power and responsibility in business. Take safe working conditions as an example. Under the protection of common law, employers during the nineteenth century gave minor attention to worker safety. Early in the twentieth century, in the face of pressure from safety and workmen's compensation laws, employers changed their attitudes to accept responsibility for job safety. Since then, very few restrictions have been imposed on business power in this area because business in general has been acting responsibly. Accident rates have been reduced dramatically until the workplace is safer than most areas away from work. For an opposite example, consider unemployment. Business in the first quarter of this century remained callous about technological and market layoff. As a result, business lost some of its power to government, which administers unemployment compensation, and to unions, which restrict business by
6 Keith Davis and Robert L. Blomstrom, Business and its Environment (New York: McGraw-Hill Book Company, 1966), p. 174. 7 Howard R. Bowen, Social Responsibilities of the Businessman (New York: Harper and Row, Publishers, 1953), p. 4.

means of tight seniority clauses, supplemental unemployment benefits, and other means. Now business finds itself in the position of paying unemployment costs it originally denied responsibility for, but having less control than when it did not payI Business power has drained away to bring the powerresponsibilty equation back into balance. Consider also the equation in terms of a current problem-gainful employment of older workers. The plight of workers in the over-45 age bracket is well-known. Despite public pronouncements of interest in them and despite their general employability, many of them find job opportunities limited or even nonexistent. At this time the power of initiative is still substantially with business, but it is beng gradually eroded by fair employment practice laws. Will management stop this erosion by taking more responsibility? I do not know, but in any case the power-responsibility equation gradually, but surely, finds its balance. I believe that the logic of balanced power and responsibility is a useful model for understanding the social-responsibility dilemma in which business managers exist today. And the Iron Law of Responsibility offers the historical imperative that social responsibility must be balanced with power in the long course of business history. More specifically, in the operating areas where social power exists, social responsibility exists also-and in approximately the same amount. Social responsibility is expressed in law, custom, and institutional agreements that define conditions for responsible use of power, but, more important for our purposes, it is expressed in responsible selfregulation by informed, mature managers who understand the social system in which they operate. Managers are the long-run key to effective social responsibility by business institutions. With socially competent managers, we can have a socially competent business system and the productivity and human fulfillment that successful business can bring.

BUSINESS HORIZONS