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.
ow does a modern business manager

H know what to do in the area of social

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.

W I N T E R , 1967

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

45

I~rrr~ DAvis

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.

WHAT IS SOCIAL RESPONSIBILITY?

46

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

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

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-

WINTER, 1967

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.

47

KEITI4 DAWS

48

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

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

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.

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.

WINTER, 1967

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

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-

49

KEITH DAVIS

50

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