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Chapter 3: Business Ethics and Corporate Social Responsibility

Every business decision has a cost and a return, but not every decision that pays well is right. A sweet shop that buys cheap adulterated milk solids before a festival earns more on each kilogram sold, and loses its customers the moment the first complaint spreads. A firm that pays its taxes late holds on to cash for a few months, and invites the attention of the authorities for years. Business runs on the resources of society — its land, its labour, its savings and its buyers — and society sets conditions on how those resources may be used. Some of those conditions are written into law. Many are not; they are simply the standards of conduct that people expect a business to observe if it wishes to keep their trust. This chapter deals with those standards. It explains what business ethics means and why it matters, sets out the obligations a business owes to owners, investors, customers, employees, the State and the community, and examines corporate social responsibility and its features.

Figure

Fig. 3.0-1 — Ethical Conduct At The Workplace Photograph of a business team seated around a table in discussion with a printed code of conduct document visible before them.

3.1 Business Ethics: Meaning And Concept

A business is free to earn profit, but it is not free to earn it by any method at all. It buys from suppliers, sells to customers, employs workers and draws on public resources, and each of these dealings involves a choice about what is fair. The rules a business applies to those choices are what we call its ethics.

Ethics as a subject deals with what is right and what is wrong in human conduct generally. When the same question is asked about the conduct of business — about pricing, advertising, wages, weights and measures, taxes and competition — the answer takes the form of business ethics.

3.1.1 What Business Ethics Means

Business ethics refers to the system of moral principles and rules of conduct applied to business. It means that business should be carried on according to certain self-recognised moral standards, and that a business, being a part of society, should not act in a manner harmful to society or to the business community itself.

NoteDefinition

Business Ethics Business ethics is the system of moral principles and rules of conduct applied to business, by which a businessperson judges whether a decision or an action is right or wrong in terms of the welfare of society.

There is no complete agreement on what those standards are. Peter Drucker took the view that there is no separate ethics of business and none is needed, since men and women do not cease to be bound by ordinary rules of personal conduct merely because they hold an office in a firm. On this reasoning, business ethics is not a special code but the general moral code applied to a particular field of activity.

The oldest professional standard makes the same point in negative form. The physician’s rule of primum non nocere, meaning ‘not knowingly do harm’, requires a professional to weigh a decision for its effects on others before acting on it. Applied to business, it rules out any practice that knowingly injures the customer, the employee or the public.

Ethics also works as a form of self-discipline. Law can act only after a wrong has been committed and only where a rule exists; ethics acts before the decision is taken, and covers ground that no statute reaches.

Ethics And Law Law is the body of rules the State enforces; ethics is the body of moral standards society expects. Every unlawful act is punishable, but an act may be unethical and still remain perfectly within the law.

3.1.2 Ethical Principles A Business Should Follow

Because ethics is a matter of conduct rather than of statute, it is expressed as a set of working principles rather than as a code. The following are commonly accepted as constituting ethical conduct in business, and each is followed for a reason, not merely as a rule.

  1. Honest dealing with customers — do not deceive or cheat customers by selling substandard or defective goods, by under-measurement or by any similar means. A customer who discovers the deception is lost permanently, and takes others with him.
  2. Fair competition — do not destroy or distort competition, and do not tarnish the image of a competitor by unfair practices. Competition disciplines cost and quality, so a business that suppresses it eventually loses its own efficiency.
  3. No hoarding or profiteering — do not withhold stock to create an artificial shortage or to force up the price. Such conduct transfers wealth from the buyer without producing anything, and invites intervention by the State.
  4. Prompt payment of dues — pay taxes and discharge other obligations on time. The public services a business depends on are financed by these payments, and delay attracts penalty and loss of reputation.
  5. No secret payments — refrain from kickbacks or payoffs to customers, suppliers, officials or others. A payment that has to be concealed is an admission that the decision it buys could not have been won on merit.
  6. No cartel agreements — do not enter into arrangements, even informal ones, to fix production or price to the common detriment. The gain to the parties comes entirely at the cost of the buyer.
  7. Accuracy in advertising, labelling and packaging — state only what the product actually is and does. The buyer cannot verify most claims before purchase, so the whole system of selling at a distance rests on this accuracy.
  8. Fair treatment of employees — pay fair wages and treat employees fairly. Employees who are underpaid or insecure give less to the work, and the cost of replacing them repeatedly exceeds the saving.
  9. Accurate records — keep true business records and make them available to all persons authorised to see them. Investors, lenders and regulators act on these records, and a false record misleads every decision built on it.

Note down three advertisements you came across this week. For each, state whether the claim made about the product can actually be verified by the buyer before purchase.

3.2 Elements Of Business Ethics

Ethics remains an idea until it is built into the way a firm actually works. A business that wishes its people to act ethically has to decide what it stands for, put that in writing, apply it to real decisions, and check whether it is being followed. The elements described below are the parts of that arrangement, and together they are what turn a general intention into ordinary practice.

  1. High business values — the firm holds and states the beliefs it will not trade away, such as honesty in dealing, fairness in pricing and truthfulness in what it claims. Without an agreed standard at the top, every employee is left to apply a private one.
  2. Ethical evaluation of managerial decisions — every significant decision is examined for its effect on customers, employees, investors and the public, and not for its effect on profit alone. This is where ethics is either applied or abandoned, because a decision once taken is difficult to reverse.
  3. Adoption of fair means to achieve objectives — the target set for a manager is pursued only by methods the firm would be willing to disclose. Where the objective is legitimate but the means are not, the firm has merely postponed the cost of the wrong.
  4. Ethical cooperation with stakeholders — suppliers, distributors, employees and customers are dealt with on terms each of them understands and accepts. A firm cannot behave ethically on its own if the parties it works with are pushed into practices it would not itself defend.
  5. Keeping promises and discharging social responsibilities — commitments about delivery, quality, payment and employment are honoured, and the obligations the firm owes to society are met. The value of a promise to a business lies entirely in the expectation that it will be kept.

Business ethics is also described as resting on values, rights and duties: values state what the firm considers desirable, rights state what each party may legitimately claim from it, and duties state what the firm must therefore do. A written code of conduct is the usual way of recording all three, so that the standard does not depend on who happens to be in charge.

Codes Of Conduct In Indian Companies Listed companies in India are required to adopt a written code of conduct for their directors and senior management and to report on its observance in the annual report. Putting the standard in writing makes it enforceable inside the company and visible to investors outside it, which is precisely what an unwritten understanding cannot achieve.

What Shapes A Firm’s Ethics

No business sets its standards in isolation. What is treated as acceptable conduct in a firm is drawn from several sources at once, and these are summarised in FC 3.1.

Flowchart

FC 3.1 — Influences On Business Ethics Business Ethics ← Social values; Legislation and government regulation; Industry norms and trade practice; Personal values of owners and managers; Professional standards

Of these, social values and personal values work from within and cannot be enforced, while legislation and government regulation work from outside and can be. Industry norms and professional standards sit between the two: they are not law, but a firm that ignores them loses standing among the people it must do business with.

Values And Ethics Values are beliefs about what is desirable — honesty, fairness, service. Ethics is the standard of conduct that follows from those beliefs and governs actual decisions. Values state the belief; ethics applies it.

3.3 Importance Of Business Ethics

Ethical conduct is often presented as something a business owes to society. It is that, but it is also something the business needs for itself. A firm depends on a continuing willingness of customers to buy from it, of employees to work for it, of suppliers to extend credit to it and of the State to leave it alone. Each of these is withdrawn when conduct falls below what is expected, and none of them is easily won back.

Business ethics has therefore gained importance for the following reasons.

  1. Business is part of society — a firm draws its labour, its capital, its raw material and its buyers from society, so the values society holds must guide the way it operates. A business cannot work by a standard the community around it rejects.
  2. Loss of image and of the right to exist — when a business fails to behave as society expects, it loses its reputation first and its custom afterwards. In extreme cases the community withdraws its acceptance altogether, and no amount of advertising restores it.
  3. The businessman acts as a trustee — a business holds the money of investors, the livelihood of workers and the trust of customers and suppliers. Because it acts for others and not only for itself, it is bound to observe the norms those groups expect.
  4. Law follows ethics — statutes are largely a written record of the standards a society already accepts. Conduct that is clearly unethical therefore tends to attract legal restriction sooner or later, and the firm that waited for the law has to change under compulsion rather than by choice.
  5. Consumers are organised — buyers are no longer isolated and helpless. They form associations, complain publicly and use the redressal machinery available to them, so unfair dealing now carries a cost that can be enforced.
  6. Ethics regulates conduct within the firm — a clear standard tells employees at every level what is permitted before a difficult situation arises, which reduces the need for supervision and the risk of individual misjudgement.
  7. Long-term benefit and balanced growth — ethical practice sacrifices some immediate gain and returns it as repeat custom, stable employment and steady access to finance. Growth built this way is slower but does not have to be defended later.

Organised Consumers Consumer associations in India take up complaints on behalf of buyers, and the Consumer Protection Act, 2019 provides a three-tier redressal machinery that an individual consumer can approach directly. A dissatisfied buyer no longer has to absorb the loss quietly, which is why unfair dealing has become expensive rather than merely disreputable.

Ethical conduct is illustrated in Case 3.1.

Case 3.1 — The Claim On The Carton Sunlight Foods Ltd. sells a packaged breakfast cereal. Its marketing head proposes printing ‘reduces cholesterol’ on the carton, although the company’s own testing does not support the claim. Sales would rise sharply for a season. The managing director refuses, and instructs that only tested claims may appear on any package. Q. State the ethical principle the managing director has applied, and explain one long-term benefit the company gains by applying it.

Ask two shopkeepers in your locality what they do when a customer returns a defective item, and note whether their answer is the same as what the manufacturer’s package promises.

3.4 Social Responsibility Of Business

A business does not operate in a vacuum. In the course of ordinary trading it comes into contact with owners, investors, customers, employees, the government and the community, and each of these groups is affected by what it decides. These groups are its stakeholders, and the obligations owed to them are what the subject calls social responsibility.

3.4.1 Meaning And Concept Of Social Responsibility

Social responsibility of business refers to its obligation to take those decisions and perform those actions which are desirable in terms of the objectives and values of society. A firm that accepts this obligation is saying that it will pursue its own profit objective and the aspirations of society together, rather than treating the second as somebody else’s concern.

NoteDefinition

Social Responsibility Social responsibility is the obligation of a business to take decisions and follow courses of action that are desirable in terms of the objectives and values of society, alongside its own objective of earning profit.

This idea stands against the older view that a business exists only to maximise the profit of its owners and that public good is no part of its concern. The answer to that view is a simple one: a business uses the land, labour, capital and technology of society, and a user of society’s resources cannot claim indifference to society’s condition.

Two writers put the point in similar terms. Koontz and O’Donnell described social responsibility as the personal obligation of everyone acting in the interests of an owner to see that the rights and legitimate interests of all others are not impinged upon. George A. Steiner held that assuming social responsibility means recognising the aspirations of a society and resolving to contribute to their achievement.

What A Responsible Business Ensures

From this it follows that a business discharges its social responsibility when it ensures the following.

  1. Adequate profit on the capital employed — a firm that does not earn enough to sustain itself cannot serve any group for long, so reasonable profit is the first condition of responsibility, not a departure from it.
  2. Adequate wages to employees according to the work done — wages are the employee’s share of the value created, and an inadequate share is a transfer from the worker to the owner.
  3. A competitive rate of return on capital — investors compare returns across opportunities, and a firm that does not offer a fair return loses access to the funds it needs to continue.
  4. Availability of goods to consumers at fair prices — the consumer’s claim is to receive the promised quality at a price that reflects cost and a reasonable margin, not scarcity.
  5. Efficient use of social resources — the land, power, water and material a firm uses are drawn from a limited common stock, so waste by one enterprise is a loss to every other user of that stock.
  6. Regard for social and national values — the firm’s decisions on what it makes, how it advertises and where it operates should not run against the values of the community it works within.

Going Beyond The Rule A dyeing unit is required to treat its effluent to a prescribed standard before discharging it. The unit instead installs a recycling plant that returns most of the treated water to its own process. It has met a legal duty and gone past it, and in doing so has reduced both its water bill and the burden it places on the local supply.

3.5 Responsibility Of Business Towards Different Interest Groups

Social responsibility becomes usable only when it is broken down by group, because what the customer expects and what the investor expects are not the same thing and can pull in opposite directions. A firm therefore has to know exactly what it owes to each group it deals with. The groups are set out in FC 3.2.

Flowchart

FC 3.2 — Interest Groups Of A Business Business → Itself and its owners, Shareholders and investors, Customers, Employees, The State, The community and society

3.5.1 Responsibility Towards The Business Itself And Its Owners

The first responsibility of a business is towards itself. The goals for which it was established must actually be achieved, and achieved efficiently, because a firm that fails at its own purpose is in no position to serve anyone else.

  1. Achieve the goals for which the business was set up — every other obligation depends on the enterprise continuing to exist.
  2. Conduct operations efficiently and effectively — waste raises cost, and cost is ultimately recovered from either the customer or the employee.
  3. Earn adequate profit — profit finances replacement, expansion and the bad years, and is therefore the condition of continuity rather than a departure from responsibility.
  4. Produce goods and services that customers actually require — output that does not answer a real need is a waste of the resources committed to it.
  5. Refrain from exploiting monopoly power — a dominant position obtained by efficiency is legitimate; using it to charge what the buyer cannot refuse is not.
  6. Maintain quality and charge a fair price — a fair price with dependable quality secures repeat custom, which is cheaper to hold than new custom is to win.

3.5.2 Responsibility Towards Shareholders And Investors

Shareholders and investors provide the funds with which the business operates. They part with money today in the expectation of a reasonable return and of growth in the value of their holding, and they cannot supervise the daily use of that money themselves. Management therefore acts as their trustee.

  1. Safety of the capital invested — the funds must be employed in the business and not diverted to unproductive or unauthorised uses.
  2. A fair return on capital — an investor who receives less than a comparable opportunity would give has no reason to remain invested.
  3. Safety and growth of the company’s assets — the assets are the security behind every shareholder’s stake.
  4. Full and timely information — shareholders can judge the management’s stewardship only from what they are told, so information must be accurate and must not be released selectively.
  5. Impartiality between shareholders — no group of holders should be favoured over another, and the interests of minority shareholders in particular must be represented.
  6. Optimum utilisation of resources — capital lying idle or badly deployed earns nothing while continuing to cost the investor.

3.5.3 Responsibility Towards Customers

Customers want good quality at the lowest price they can obtain, and a business that they stop patronising has to stop operating. Customer satisfaction is therefore not a courtesy but the source of the firm’s revenue.

  1. Produce goods suited to different classes, tastes and purchasing powers — a market is made of unlike buyers, and a single offering serves only a part of it.
  2. Supply goods of assured quality — the buyer usually cannot test the product before purchase and must rely on the seller’s standard.
  3. Charge fair prices — a price unrelated to cost and value is a form of extraction, and drives the buyer to the first available substitute.
  4. Maintain a regular and proper distribution system — a product that is not available where and when it is needed has not been supplied at all.
  5. Refrain from hoarding — withholding stock to raise price harms the buyer and, once discovered, the seller’s standing.
  6. Handle complaints carefully and analyse them objectively — a complaint is the cheapest information a firm receives about its own defects.

3.5.4 Responsibility Towards Employees

Employees supply the labour on which every operation depends, and they commit their working lives to an enterprise they do not own. Management that wants their effort must first satisfy their reasonable needs, and must recognise their right to organise for the protection of their economic and social interests.

  1. Fair wages and regular employment — wages that fall below what the work is worth invite the employee to leave at the first opportunity, and replacement is expensive.
  2. Good and safe working conditions — safety against accidents is a duty in itself, and an unsafe workplace loses output as well as goodwill.
  3. Incentive schemes linked to performance — an employee who shares in the gain has a reason to produce it.
  4. Security of employment and social security benefits — provision for old age, sickness and unemployment allows the employee to plan, and reduces the anxiety that shows up as poor work.
  5. Opportunities for self-development and promotion — the ablest employees leave first when a firm offers them no route upward.
  6. Participation of workers in management — decisions that affect the workplace are better accepted, and often better made, when those who must carry them out are consulted.

Statutory Benefits For Employees An employee in the organised sector in India receives more than the monthly wage. Contributions to the Employees’ Provident Fund, gratuity on completing the qualifying period of service and paid leave of specified kinds are all provided for by law. These are legal obligations, so the socially responsible employer is judged not by whether it provides them but by what it does above them.

3.5.5 Responsibility Towards The State

The State protects the interests of every group in society and provides the roads, power, courts and security that business could not create for itself. An enterprise therefore owes the State the conduct of a citizen, and where it fails, the State intervenes under the powers its statutes give it.

  1. Regular and full payment of taxes and duties — public services are financed from these receipts, and evasion shifts the burden to those who pay honestly.
  2. No bribes to public servants — a payment made to obtain a decision defeats the purpose for which the office exists.
  3. Assistance in checking black marketing and adulteration — the firm sees these practices in its own trade before any inspector does.
  4. Obedience to State regulations — regulation exists because the market by itself does not protect every interest.
  5. Cooperation with State policies for economic and social justice — a business that works with declared national priorities avoids the restrictions that resistance eventually brings.
  6. No use of political influence for business advantage — an advantage obtained in this way is taken from a competitor rather than earned in the market.

3.5.6 Responsibility Towards The Community And Society

A business operates within a community whose land, water, air and people it uses, and whose quality of life it affects whether or not it intends to. Its obligation here is to leave that community no worse off, and where it can, better off.

  1. Efficient use of national resources — resources are finite and shared, so waste by one enterprise is a cost borne by all.
  2. Generation of employment in the locality — income earned locally is the most direct contribution a firm makes to the place it operates in.
  3. Better environmental conditions — pollution is a cost the firm creates and the community pays unless the firm controls it at source.
  4. Safety measures against industrial hazards — the risks of a plant fall first on the people living nearest to it.
  5. Preservation of social and cultural values — no decision should be taken that runs against the values of the community, however profitable it may be.
  6. Support for the general welfare of the locality — contributions to education, health and civic facilities improve the very workforce and market the firm depends on.

Case 3.2 applies these obligations to a single situation.

Case 3.2 — Two Claims On The Same Rupee Vardhan Ceramics Ltd. has had a profitable year. The finance head proposes a larger dividend to keep shareholders satisfied. The works manager proposes spending the same amount on a dust-extraction system for the grinding shed, which the law does not presently require. The board must choose. Q. Identify the two interest groups whose claims are in conflict here, and state the responsibility the business owes to each of them.

3.6 Corporate Social Responsibility

The obligations described so far apply to business of every size. When a large company organises them deliberately — as a policy, with money set aside and results reported — the practice is given a name of its own: corporate social responsibility.

3.6.1 Meaning Of Corporate Social Responsibility

Corporate Social Responsibility (CSR) refers to the responsibility of business organisations to work for the welfare of society while carrying on their business activities. It means that a company should not look only at the profit it earns but also at the social, economic and environmental effects of the way it earns it.

NoteDefinition

Corporate Social Responsibility Corporate social responsibility is the responsibility of a business organisation to work for the welfare of society while carrying on its business, by considering the social, economic and environmental effects of its operations on all its stakeholders.

The reasoning behind it is the one already established. A company functions within society and uses its land, labour, capital and technology, so it is expected to contribute to society in return. Discharging that expectation means conducting the business itself responsibly — fair wages and safe conditions for employees, good and safe products for consumers, protection of the environment from pollution — and then going further, into activity the business is not obliged to undertake at all.

In the earlier period profit maximisation was treated as the sole objective of business. As awareness grew of pollution, unemployment, inequality and the exploitation of consumers, the role expected of business widened, and a modern company is expected to balance its economic goals against its social obligations and to contribute to sustainable development.

CSR activity commonly takes the form of support for education and healthcare, conservation of natural resources, rural development, generation of employment and assistance to weaker sections. Indian companies have taken this up in different ways. The Tata group has long supported education, healthcare and community development in and around Jamshedpur. Infosys Foundation funds educational institutions, hospitals and relief work. Indian Oil Corporation has supported drinking water supply, health centres, schools and libraries.

ITC And e-Choupal ITC Limited’s e-Choupal initiative puts internet access in villages so that farmers can obtain prices, weather information and agricultural advice, and can sell without depending entirely on the local intermediary. The farmer gains a better realisation and the company gains a dependable supply of graded produce — a social contribution that also strengthens the business that makes it.

CSR And Business Ethics

The two ideas are closely connected but are not the same. Business ethics governs how a company conducts its own operations, while CSR concerns what the company contributes beyond them. In practice a firm that is unethical in its daily dealings gains little from a CSR programme, because the harm is done in the same place the benefit is claimed. The distinction is set out in Table 3.2.

Table 3.2 — Business Ethics And Corporate Social Responsibility | Basis | Business ethics | Corporate social responsibility | |—|—|—| | Meaning | Moral principles governing business conduct | Voluntary contribution by a company to social welfare | | Concern | How the business earns its profit | What the business gives back beyond its operations | | Scope | Applies to every decision taken inside the firm | Applies to identified programmes and activities | | Applies to | Every business, of any size | Mainly organised companies, particularly large ones | | Expenditure | Requires no separate spending | Usually requires funds set aside for the purpose | | Failure results in | Unfair or dishonest conduct | Neglect of the wider community |

3.6.2 Features Of Corporate Social Responsibility

  1. Voluntary in nature — CSR is generally undertaken out of moral and ethical conviction rather than compulsion, and companies engage in welfare activity even where no rule requires it. What is given voluntarily can also be shaped to what the company is actually able to do well.
  2. Ethical business practices — CSR requires honesty, transparency and fairness in the ordinary conduct of business, including fair treatment of employees and safe products for consumers. Without this, welfare spending is only a cover.
  3. Stakeholder-oriented approach — the interests of employees, customers, suppliers, government and the community are considered and not those of shareholders alone, because all of these groups bear the consequences of company decisions.
  4. Concern for society and the environment — CSR covers environmental conservation, pollution control and community development, since the environmental cost of production falls on people who receive none of its profit.
  5. Long-term perspective — CSR aims at sustainable development and lasting benefit rather than short-term profit. Its returns, in goodwill and stability, appear only over years.
  6. Beyond profit maximisation — profit remains important but ceases to be the only objective, and the company is expected to balance profit-making against social welfare.
  7. Contribution to social development — through education, healthcare, employment generation, rural development and poverty alleviation, CSR activity adds to the general development of the nation and improves the workforce and market the company itself depends on.

In India, companies above a specified size are now required by the Companies Act, 2013 to spend a prescribed proportion of their average net profits on CSR activities and to report what they have spent. For those companies the expenditure is a legal obligation; the choice of cause, the design of the programme and everything done above the prescribed minimum remain voluntary.

Q. If the law requires large companies to spend on CSR, how can CSR still be described as voluntary in nature?

A. The requirement applies only to companies above a specified size, and fixes the amount, not the purpose. Every other company, and every rupee spent above the minimum, remains entirely voluntary.

Pick any one large Indian company and find, from its website, two activities it reports under corporate social responsibility. State which group in society each activity benefits.

3.7 Summary

  1. Business ethics is the system of moral principles and rules of conduct applied to business, by which a businessperson judges whether a decision is right or wrong in terms of the welfare of society.
  2. There is no separate ethics for business; it is the general moral code applied to a particular field of activity, and it works as a form of self-discipline that acts before a decision is taken, whereas law can act only afterwards.
  3. The accepted ethical principles of business include honest dealing with customers, fair competition, no hoarding or profiteering, prompt payment of dues, no secret payments, no cartel agreements, accuracy in advertising and labelling, fair treatment of employees, and true business records.
  4. The essential elements of business ethics are high business values, ethical evaluation of managerial decisions, adoption of fair means to achieve objectives, ethical cooperation with stakeholders, and keeping promises and discharging social responsibilities. Values, rights and duties underlie all of them, and a written code of conduct records them.
  5. A firm’s ethics is shaped by social values, legislation and government regulation, industry norms, the personal values of owners and managers, and professional standards.
  6. Business ethics is important because business is part of society, because unethical conduct costs a firm its image and eventually its acceptance, because a businessman acts as a trustee of other groups, because law follows ethics, because consumers are now organised, because a clear standard regulates conduct within the firm, and because ethical practice yields long-term benefit and balanced growth.
  7. Social responsibility is the obligation of a business to take decisions and follow actions that are desirable in terms of the objectives and values of society, alongside its own profit objective.
  8. Social responsibility is broader than legal responsibility. Legal responsibility is discharged by mere compliance with the law and is compulsory; social responsibility includes that compliance and extends, voluntarily, to obligations no statute imposes.
  9. A business owes specific obligations to six interest groups:
  1. Itself and its owners — achieving its goals efficiently, earning adequate profit, maintaining quality and charging a fair price.
  2. Shareholders and investors — safety of capital, a fair return, full and timely information, and impartiality between holders.
  3. Customers — goods of assured quality at fair prices, regular availability, no hoarding, and careful handling of complaints.
  4. Employees — fair wages, safe working conditions, security and social security benefits, opportunities for advancement, and participation in management.
  5. The State — full and timely payment of taxes, no bribes, obedience to regulations, and cooperation with State policies.
  6. The community and society — efficient use of national resources, local employment, control of pollution, safety against industrial hazards, and regard for social and cultural values.
  1. Corporate social responsibility is the responsibility of business organisations to work for the welfare of society while carrying on business, considering the social, economic and environmental effects of their operations.
  2. The features of corporate social responsibility are that it is voluntary in nature, rests on ethical business practices, follows a stakeholder-oriented approach, shows concern for society and the environment, takes a long-term perspective, goes beyond profit maximisation, and contributes to social development.
  3. Business ethics governs how a company earns its profit, while corporate social responsibility concerns what it contributes beyond its operations. In India, companies above a specified size are required by the Companies Act, 2013 to spend a prescribed proportion of their average net profits on CSR activities and to report that spending.

3.8 Key Terms

  1. Business ethics The system of moral principles and rules of conduct applied to business, by which a businessperson judges whether a decision or an action is right or wrong in terms of the welfare of society.
  2. Code of conduct A written statement of the values a business holds and the standards of behaviour it requires of its people, so that the standard does not depend on who is in charge.
  3. Corporate social responsibility The responsibility of a business organisation to work for the welfare of society while carrying on its business, by considering the social, economic and environmental effects of its operations on all its stakeholders.
  4. Social responsibility The obligation of a business to take decisions and follow courses of action that are desirable in terms of the objectives and values of society, alongside its own objective of earning profit.
  5. Stakeholders The groups affected by the decisions of a business — its owners, investors, customers, employees, the government and the community.

3.9 Points To Ponder

  1. Ethical conduct usually costs a business something in the short run and repays it only over years. What does a firm need in place — in ownership, in finance, in the way managers are assessed — before it can afford to wait that long?
  2. If a practice is legal but widely regarded as unfair, and every competitor follows it, is a single firm that refuses to follow it acting responsibly or simply putting itself out of business? What would change your answer?
  3. Social responsibility is said to be voluntary, yet large companies in India must now spend a prescribed amount on CSR. Does making an obligation compulsory strengthen it, or does it turn a moral duty into one more compliance formality?
  4. A company’s obligations to its shareholders and to its employees can point in opposite directions when profits are thin. On what basis should a board decide between them, and who should bear the loss first?
  5. Some argue that a business serves society best simply by producing good goods efficiently, employing people and paying its taxes, and that welfare spending is properly the work of the State. Weigh that argument against the case for corporate social responsibility.
  6. A firm that advertises its charitable work is sometimes accused of buying reputation rather than doing good. Does the motive behind a socially responsible act affect its value to society, or only its value to the firm?

3.10 Objective Questions

  1. Which of the following is the best statement of what business ethics means? [1]
  1. The legal rules that a business is required to obey
  2. The moral principles and rules of conduct applied to business
  3. The amount a company spends on social welfare each year
  4. The personal beliefs of the owner about religion and duty
  1. A trader withholds stock of an essential item during a shortage so that he can sell it later at a higher price. This conduct is best described as: [1]
  1. Fair competition
  2. Optimum utilisation of resources
  3. Hoarding and profiteering
  4. Long-term perspective
  1. There are two statements given below, marked as Assertion (A) and Reason (R). Read the statements and choose the correct option. [1] Assertion (A): Social responsibility is broader than legal responsibility. Reason (R): Legal responsibility is discharged by mere compliance with the provisions of the law.
  1. Both (A) and (R) are true, and (R) is the correct explanation of (A).
  2. Both (A) and (R) are true, but (R) is not the correct explanation of (A).
    1. is true, but (R) is false.
    1. is false, but (R) is true.
  1. Fill in the blank: A written ________ records the values a firm holds and the standards of behaviour it requires of its people. [1]
  2. State whether the following statement is true or false: A company that donates generously to charity has, by that fact alone, discharged its social responsibility. [1]

3.11 Check Your Concepts

  1. Define business ethics and state any one ethical principle that a business is expected to follow. [2]
  2. Distinguish between social responsibility and legal responsibility on any three bases. [3]
  3. State any three responsibilities of a business towards its shareholders and investors, and explain why each of them matters to the investor. [3]
  4. ‘A business that behaves ethically loses money to competitors who do not.’ Evaluate this claim with reference to the importance of business ethics. [4]
  5. Explain any six features of corporate social responsibility, giving in each case the reason why that feature is regarded as essential to it. [6]

3.12 Case-Based Questions

  1. Neelkanth Foods Ltd. operates a fruit processing unit in a small town. The unit employs two hundred workers from the surrounding villages, buys its fruit from local growers and draws water from a canal that also serves those villages. In a year of poor rainfall, the managing director rejects a proposal to increase output by drawing additional water, and instead approves a rainwater harvesting system at the plant. In the same year the company defers a wage increase it had promised its workers, in order to protect the dividend to shareholders. [4]
  1. Identify the interest group towards which the company has discharged its responsibility by installing the harvesting system, and state one reason why this is described as social rather than legal responsibility. [2]
  2. Name the interest group whose claim the company has set aside, and state the responsibility a business owes to that group. [2]