What is responsible business?

Companies have a wide range of responsibilities over and above their responsibility to shareholders. The view of Milton Friedman that “There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits” is seen as an increasingly outdated. In a world where the detrimental health impacts of pollution and the damaging effects of climate change are often in the news, it is important for companies to have a clear environmentally responsible business strategy (ERBS).

The common view from environmental economics is that companies have a responsibility to factor in “negative externalities” such as pollution into their business model. Non-governmental agencies (NGOs), action groups and other stakeholders are increasingly bringing companies to account for their actions on reducing greenhouse gas emissions, reducing the movement of goods and people, how their supply chain is managed and recycling. Although compliance with national environmental regulations is a requirement that all companies must meet, going above and beyond these regulations so that a company acts in an environmentally, as well as socially responsible way, can lead to considerable business benefits.

One concrete example is that, in a world of climate change and possible resource scarcity, companies are realising that they need to extend control over their supply chain to ensure that environmentally damaging activities such as illegal logging and water pollution are mitigated. Other companies are purchasing renewable energy companies to ensure a green supply of electricity or investing in national or regional recycling plants to enable them to source raw materials locally. Although such strategies have the potential benefit of protecting a company’s image, they can also be profitable and seen by many companies as a pre-emptive move to guarantee their future supply of raw materials given the widespread view that the stringency of environmental regulations is likely to increase in the future.

However, while companies generally acknowledge that they have a moral and ethical obligation to protect the environment, care is needed to ensure that they avoid the claim of greenwashing whereby a company gives the impression that it is being environmentally responsible through innovative PR without making any real progress on delivering a more sustainable business model. In terms of a future academic research agenda, the area of environmentally responsible business provides academics with a wide range of interesting and important areas for future investigation. Topics include green energy, preventing waste, biodiversity, the implementation of environmental management systems, greening supply chains through vertical and horizontal integration, greening trade, outsourcing and offshoring polluting manufacturing processes, the use of green technologies, the creation of “green” jobs and investigating the practices of banks to ensure that lending takes into account the environmentally responsible business strategies of borrowers.

Companies that operate globally need to accept that, regardless of their size, an ERBS is required to protect the very natural resources that they use to make a profit for shareholders. The World Business Council for Sustainable Development aims to promote these initiatives reinforced by the Global Compact promoted by the United Nations. Companies that take an environmentally responsible business approach have wide ranging opportunities, from government grants and subsidies for the introduction of green technologies that could provide a potentially lucrative path to profitability for large and small businesses. Lloyds Banking Group Centre for Responsible Business promises to put the environment at the heart of its research agenda. The Business School has a number of Professors, lecturers and PhD students working on a wide range of related topics. With the support of the Centre and Birmingham Business School, we aim to become a leading institution for the study of environmentally responsible business.

The concept of responsible business is a problematic one because it invites the questions: responsible to whom and responsible for what? My disciplinary background is employee relations and so from my perspective I acknowledge responsibility of business to shareholders, but promote business responsibility to internal stakeholders, namely workers. The term workers is used deliberately because of the increasing incidence of self-employed workers (with commercial contracts) replacing employees (with an employment contract) - certainly not an expression of responsible business.

From this perspective, the business is responsible for welfare of its workers, not simply in terms of their health and safety while at work, but their ability to meet extra work commitments, for example family commitments, through work/life balance initiatives and sufficient pay. Each of these, work-life balance and sufficient pay, is mutually beneficial for the firm because they are associated with greater levels of job satisfaction, organizational commitment and consequently greater work effort and engagement. Moreover, higher levels of pay not only increase worker effort, as per the efficiency wage hypothesis, but also facilitate greater levels of consumption.

Whereas a strong case might be made for the congruence of responsibility to workers and to shareholders, the same degree of congruence is not always present between the interests of workers and the broader social context. A very obvious example would be the case of tobacco or arms firms, whereby the interests of wider society might be best served by the cessation of firm operations. This is certainly not in the interests of the worker - think of the debate over Trident in the UK. My research interests include a focus on where the two responsibilities (to the worker and to society) intersect.

 

A responsible business strives to maximise its contribution to society’s efforts to achieve the United Nations’ Sustainable Development Goals. The Sustainable Development Goals were adopted by the United Nations General Assembly in 2015 and comprise a set of specific targets to be reached by 2030 so as to end poverty, protect the planet, and ensure prosperity for all. If the Sustainable Development Goals are to be achieved, then all parts of society will need to contribute, including businesses. As such, a responsible business will identify its impacts, negative and positive, on society’s efforts to achieve the Goals and then work to eliminate its negative impacts and to build upon its positive impacts so as to become a force for sustainable development.

 

The idea of ‘responsible business’ is straightforward. It means people working in organizations reflect on the ethical implications of their individual actions, the ethical implications of the systems and processes they design to accomplish the purpose of the business, and think through the purpose of the business overall as an ethical issue.

The idea of ‘responsible business’ is complex. Everyone has an opinion on what business is, or should be, and everyone has an opinion on what responsibility means. Most academic commentaries start with Chicago economist Milton Friedman’s assertion that the only social responsibility of business is profit maximisation, because businesses are social organizations that are legally and morally obliged only to their shareholders.

Friedman’s assertion continues: ‘….so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud’. This is where the practice and debate as to what responsible business is, becomes interesting. The context raises three crucial questions with important implications:

1. What are the rules of the game? (and are they reasonable?)
2. Is there open and free competition? (and is that desirable for the production of all goods and services?)
3. Is it possible to practise business without deception or fraud? (broadly defined)

These questions are important because they are asked by organizational members, consumers and customers, undergraduate students, and politicians. Answering them is a process – research-based, educational, and based on public debate. Despite what Friedman wanted to promote, the question of what responsible business is cannot be clarified with a single sentence. That approach is a crude way of thinking, justifiable only as a political position, which leads to crude forms of practice.

Friedman did do everyone a favour, though. His claim and the questions it generates are among the most fundamental and interesting questions anyone can ask of business. They extend beyond functional issues, but how we respond to them can have considerable implications for how we approach marketing, finance, people management, logistics, and strategy. In that sense, thinking about what responsibility is, frames how we think about what business is. That means that these are deeply practical questions.