Businesses’ primary responsibility is towards its shareholder is no longer a valid argument today. Advocates of this argument, such as Milton Friedman, brought fine points to explain why shareolders interest must be the sole focus of the businesses. For example, when the businesses focus on profits it becomes more efficient and consequently contributes to the society by managing its resources effectively. However when businesses are left alone and unsupervised, it went onto achieve these profit objectives through means that not sustainable in the long term harming the society including its shareholders. The history provides number of examples of corporate scandals that had resulted in due to greed and power of those who manage them focusing primarily on profit.
Another fine point is market mechansim taking care of those businesses which are efficient thus being shareholder oriented is the only responsibility a business should have. Once again however the market mechanism could fail infront of assymetric information availability to determine which business is actually efficient. Consumers and governments would fail to recognise geniune businesses from ingenuine businesses due to lack of disclosure.
The new way of thinking in this line have brought us to the argument that businesses responsibilities are towards all its stakeholders including society and evironment. This require proactive approach to solve problems faced by the society and environment thus broadening the scope of businesses beyond the profit seeking commercial activities. Why is this benefitial?
In a recent interview with Harvard Magazine Professor Micheal Porter highlights the argument that it is in the best interest of the businesses to engage in social and evironmental responsibilities for two reasons. One is due to governments being too focused on political survival and rivalry no longer are efficient in taking care of some of the demanding societial needs and wants such as education and healthcare. Even non-profit organisations which rely on donor fundings can only provide for limited scale.
The Second is the advantage businesses have on a just and advance society which meets sociatial needs effectively. For example an educated workforce is utlimately benefitial in being productive and healthy workforce will reduce cost of overheads. Similarly a sustainable environment ensure long term supplies, consumer motivation for a higher standard of living driving up demand for goods and services.
Compared to governments and non-profit organisations businesses are also experts in being efficient and therefore they are better positioned to carryout social responsbilities effectively. Considering the utlimate benefits of a progressive and sustainable socieity it seems it is apparent that businesses proactively engaged in being responsible for all their stakeholders, not just the shareholders. This however lead to other questions such as what should be the role of governments if business are efficient and proactive in meeting social needs.