Davis Keith Understanding the RSC

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P u z z l eW h a t D o e s T h e B u s i n e s s m a n O w e t o S o c i e t y ?

KEITH DAVIS

In our pluralistic society, business is influ-enced by all other groups in the system, andbusiness in turn, influences them. Therefore,the businessman must be socially responsiblefor his actions. Mr. Davis explains why suchresponsibility has had recent emphasis. Notonly are the parts of modern society moreinterdependent, but the social sciences aregiving us new knowledge about how busi-ness affects the other parts. Also, in modernbusiness, with ownership and control sepa-rated, managerial responsibility must beidenti f ied and directed. The power-respon-sibility equation (social responsibilities ofbusinessmen arise from the amoun t a[ socialpower they have) clarifies managerial ob-ligations. Business, in the long run, to main-tain its position of power, must accept itsresponsibility to the whole of society.

H ow does a modern business managerknow what to do in the area of socialresponsibility? One observer says, "A busi-nessman has no responsibility to the publicexcept to sell at as low a price as he can." An-other says, "The job of business is to makea profit, and as long as it stays within thelimits of the law, it has no other responsibil-ity." At another extreme a local activistcharges, "Business materialism and unem-ployment are the main causes of juveniledelinquency, and business must give a jobMr. Davis is a professor of management , Ar izonaSta te University.

to every teen-ager in order to prevent delin-quency." And a local humanist thinks thatbusiness should pay for a new hospital be-cause, "Business can get the money, but wecan't afford to raise our taxes anymore."

In the face "of all these claims, wha t guidesdoes a manager have to assist him in makingjudgments concerning social responsibility?Should he avoid involvement in his com-munity? Should he pay attention only tothe loudest claimant, or to each squeaky"wheel? Should he support only those activi-ties in which he has a personal interest? Cer-tainly he knows that, regardless of the claimsmade upon him, he cannot solve all of so-ciety's problems. If he tried to do so, hewould preempt the work of those institu-tions that deal specifically with social prob-lems. Furthermo re, his resources are limited;he must husband them wisely and put themto the best long-run use. But how should herespond to these different claims on his or-ganization?

Discussions about social responsibilityhave reached a high pitch in recent years,and I predict that interest will continue ata high level because the social system isundergoing changes that require new modesof conduct. Both fad and fetish have devel-oped around this interest in social respon-sibility. The public press abounds withpious statements of its existence, but thereseems to be considerable confusion about

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why it exis ts , how it arises , and how impor-tant i t is for business and other orga nizationsin our socie ty . The fo l lowing comments wi l lconsider these issues and, hopefully, shedsome light on them. I will examine socialrespons ib i l i ty in terms of a fundamentalmod el that f it s together man y of the loosepieces in the social responsibili ty puzzle. Al-though my bas ic model subs tant ia l ly appl iesto any organization, including unions, gov-ernment , cooperat ives, and newspapers , th isdiscussion is with in the c ontext of a businessorganization.

WHAT IS SOCIAL RESPONSIBILITY?The subs tance of socia l respons ib i l i tyarises from concern for the ethical conse-quences of one ' s ac ts as they might af fectthe interests of others . This idea exists inmost religions and philosop hies of thewor ld . Qui te f requent ly , however , a ten-dency exists to l imit i ts application toperson-to-person contacts . Social respon-s ib i l i ty moves one large s tep fur ther byemphasizing institutional actions and theiref fect on the whole socia l sys tem. Withoutthis additional s tep, personal and institu-t ional ac ts tend to be d ivorced . A bus iness -man can lead a model personal l i fe , butcontinue to justify his organization's pollu-t ion of a r iver because no d irect personalconsequence is involved . He can cons iderr iver pol lu t ion a "publ ic problem" to besolved by publ ic ac t ion . The idea of socia lresponsib i l ity , however , requires h im to con-sider his acts in terms of a whole socialsys tem and holds h im respons ib le for theeffects of his acts anywhere in that system.

Social responsibili ty, therefore, broadensa person 's v ie w to the to ta l socia l system.Wh en a man 's pr imary f ram e of referenceis h imself , he may be counted upon forant isocia l behavior whenever h is valuesconflict with those of society. If his valuesare l imited pr imar i ly to a cer ta in group ororganizat ion , he tends to becom e a par t isanacting for that group. B ut, if he thinks interms of a whole sys tem, he begins to

build societal values into his actions, evenwhen they are for a cer ta in organizat ion .This is the essence of social responsibili ty.For the manager i t means real iz ing thatthe business system does not exis t aloneand that a heal thy bus iness sys tem cannotexist within a s ick society.

T H E G R O W I N G E M P H A S IS

Actions for the benefit of a private organi-zation may also be socially responsible; torequire that a l l ac ts be only in the publ icin teres t , compared with bo t h publ ic andprivate interests , is to deny the pluralismof society. Centers of initiative are manyin a free society, and in order to maintainthese centers , thei r goals mus t be served ,as wel l as the general welfare . But theprice that society exacts for this pluralismis that pr ivate organizat ional ac ts be madewith concern for thei r publ ic ef fects. Apluralis tic society, therefore, is a socialsys tem in which d iverse groups main ta inautonomous par t ic ipat ion and inf luence inthe social system; it connotes a concurrentpr ivate f reedom and publ ic respons ib i l i ty .P lu r a l i s m-and the p r iva te f r eedom f romwhich i t a r ises - is a bas ic cause of ourgrowing interest in social responsibili ty.

Pluralism is a basic reality in modernbusiness culture. Business is influenced byall other groups in the system, and it , inturn, influences them. Eells and Waltonhave observed , "P lura l ism always impl iesmult ip lic i ty , f re quent ly d iversi ty , and some-times conflict . I t is as much the generatoras the re s u lt o f f r eedom . . . . I t i s . . . a s muchopposed to the ambit ious pre tenees of aJames~Stuar t ( the k ing can do no wrong) ,as i t is to the Rousseanian version ofdemo cracy ( the col lec t iv i ty can do nowron g) . '1

The fact that p lura l ism dif fuses power1 Richard Eells and Clarence C. Walton, Concep-tual Foundations of Business (Homewood, Ill.:Richard D. Irwin, Inc., 1961), pp. 360 and 363.

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suggests that progress is made through re-sponsible negotiation and compromiseamong power centers. There is neither mon-olithic decision making by one org anizat ionnor pure democracy of the masses operatingfree of organizational constraints. Manypower centers exist in pluralism --none com-pletely independent, but each with someautonomy.

Pluralism also implies that business is ajoint venture of responsible citizens andgroups of citizens, such as investors, man-agers, workers, communities, scientists, andothers. Together these groups offer diverseinputs and expect diverse outputs. Viewedas a whole, the outputs are more than eco-nomic; social, psychological, political, andother outputs are also expected. This jointventu re involving many groups is not neces-sarily a conflict or struggle for absolutepower. Rather, it represents the efforts ofpeople to reconcile their needs through avariety of organizational interests.

In pluralism, the business institution,therefore, becomes responsible to a varietyof claimant groups in a variety of ways,rather than being responsible only to stock-holders, and these claimants in turn haveresponsibilities to business because of theirpower to affect it.

We can thus conclude that pluralism inmodern society is increasing our interest insocial responsibility because it multiplies thecenters of social power, all of which need tobe concerned with social responsibility asthey relat e to each othe r in the social system.Pluralism is a major conside ration in solvingthe social responsibility dilemma.OTHER REASONSHowever, several other reasons exist for therecent emphasis on social responsibility. Thefirst reason is that modern society is morecomplex, with each of its parts more depen-dent on other parts. A new social dependen-cy is evident. A century ago the acts of abusinessman in India were of little signifi-cance to the United States; today with theworld tied together in technology, communi-cation, and politics, and with U.S. firms op-

erating in India, business developments inthat country are significant to a U.S. firm.A second reason is that society has more

weal th and culture tha t it wishes to conserve.Therefore, it is less willing to risk the dis-ruptions that might occur from irresponsibleact in our society, such as sale of dangerousdrugs, nationwide transportation strikes, orstream pollution. The climate of public opin-ion increasingly insists that actions by allinstitutions and persons must be responsible.Too much is at stake to risk irresponsibility,so responsible business ac tion becomes nec-essary in order to maintain a favorable pub-lic image.

A third reason for inte rest in social respon-sibility is that the social sciences are givingus new knowledge about how business af-fects the social system beyond the companygates. Though we have always known thatbusiness affects the social system, we werenot sure how, so we were not able to offerman y proposals for improving its social func-tion. We had to wait for more knowledge ofthe business mission in society. Even whenwe did have an idea for improved responsi-bility, we tended to accept Adam Smith'smodel of pure competition in which businesswas bound by the fetters of competition andreally could not .tak e a ny actions for th epublic good except to sell at t he lowest pos-sible price. Today, however, we recognizethat business has more flexibility for respon-sible action because it no longer lives in purecompetition, and the rules of pure competi-tion do not apply.

Fourth, the growing power of governmentlooms on the sidelines waiting to add re-strictive controls the moment business be-comes lax in any area of responsibility. Busi-nessmen have learned that once a govern-ment control is established, it is seldom re-moved even though conditions change.Whe n freedom and initiative are lost to gov-ernment, they are lost for the long run. Ifthese are the facts, then the prudent coursefor business is tO unde rsta nd ful ly the limitsof its power and to use that power responsi-bly, giving government no cause to inter-vene.

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A fifth reason for our increasing emphasison social responsibili ty is that current ethicalconcepts are programming people to favormore respons ib le ac t ion . The bus inessmanshares the a t t i tudes and values of socie tyjust as he did a century ago and reflects to-day ' s a t t i tudes of more respons ib le conductin his actions.

Finally, and perhaps mos t impor tan t ,ownersh ip and contro l are more and moresepara ted in modern bus iness . The careermanage r takes the longer v iew over t ime andthe broader v iew among c la imants on theorganizat ion . The separa t ion of owner andman ag e r h as n o t b een r eq u i r ed b y l aw b u th as d ev e lo p ed de facto by delegat ion be-cause th is ar rangement worked bes t . Unfor-tunately, this arrangement also obscures thelocat ion of respons ib i l i ty . When the ownermanaged, the ac ts of the f i rm proceededfrom his initiative, and the identity andpower of the f i rm res ided in h im. In th iss i tuat ion , bo th the law and the people of thecommunity could directly f ix responsibili tywithout confus ion . But wi th the separa t ionof ownersh ip and m anagement , normal legalchannels of respons ib i l i ty have eroded . Noone is sure how much publ ic respons ib i l i tymanagers have or th rough w hat channels i ti s contro l led . One concept , however , makesmanager ia l respons ib i l i ty c lear : the power-responsibili ty equation.

HOW MUCH RESPONSIBILITY?

THE POWER-RESPONSIBILITY EQUATIONMost persons agree that bus inessmen todayhave cons iderable socia l power . Their coun-sel i s sought by government , and what theysay and do inf luences thei r community . So-c ia l power comes to bus inessmen becausethey are leaders , a re in te l l igent men of af -fa ir s , and co mm and vas t economic resources .The asse ts of the Bel l Telephone Sys tem,for example, were about $30 bill ion in 1963,making i t the larges t bus iness in the wor ld .Among manufacturers , General Motors andStandard Oi l o f New Jersey had both asse ts

and sales of over $10 bill ion in 1963. Theannual sa les of General Motors Corporat ionwere greater than the gross nat ional productof the Netherlands! ~

In many ways bus inessmen speak for theimportant insti tution we call "business ."They speak for or against legis lation, eco-nomic policy, labor relations policy, and soon in their roles as businessmen. To the ex-t en t th a t b u s in es s men -o r an y o th e r g ro n p -have socia l power , the lessons of h is torysuggest that social responsibili ty of an equalamount ar ises theref rom. S ta ted in the formof a general relationship, social responsibili-ties of businessmen arise from the amountof social power they have.

The idea that respons ib i l i ty and po wer gohan d in han d appears to be as old as civiliza-tion itself . Wherever one looks in ancientand medieval h is tory-Pales t ine , Rome, Br i -t a in -men were co n ce rn ed wi th b a lan c in gpower and respons ib i l i ty . Men have of tenfa i led to achieve th is balance , bu t they havegenera l ly sought i t as a necessary an teced entto justice, This idea has i ts origins in reasonand logic. I t is essentially a ma tter of balanc-ing the two sides of an equation. As s tatedby one philosopher, "T he dem and of the lawin a well-ordered society is that responsi-b i l i ty shal l l ie where the power of decis ionl ies . Where that demand is met , men have alegal order ; where i t i s no t , they have onlythe illusion o f one. "3

The idea of equal power and respons ib i l -i ty is not a s tranger to business either. Forexample, one of the rules of scientif ic man-agement is tha t au thor i ty and respons ib i l i tys h o uld b e b a lan ced in s u c h a way th a t eachemployee and manager is made respons ib leto the ex tent of his authority, a nd vice versa.Although this rule refers only to rel~tion-ships within the f irm, i t should apply as wellto the larger society outs ide the f irm. As amat ter of fac t , bus inessmen have beens t rong proponents of balanced socia l power

2 "The 500 Largest U.S. Industr ial Corporations,"F o r t u n e (July, 1964), pp. 179-98.

8 John F. A. Taylor, "Is the Corporation Abovethe Law?" H a r v a r d B u s i n e s s R e v i e w (March-April,1965), p. 126.

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and re sponsibili ty in external society, partic-ularly in their views on responsibili t ies oflabor leaders .

The logic of reasonably balanced powerand respons ib i l i ty i s of ten over looked bythose wh o discuss social responsibili ty. Som eargue that business is business and anythingthat smacks of social responsibili ty is out-of-bounds . Mil ton Fr iedman contends that" few t rends could so thoroughly underminethe very foundat ions of our f ree socie ty asthe acceptance by corporate officials of asocia l respons ib i l i ty o ther than to make asmuch money for thei r s tockholders as pos -s ible. "4 Ano ther autho r speaks of the "fr ight-en ing spectacle" of a powerfu l bus inessgroup that in the name of social responsibil-i ty " imposes i t s nar row ideas about a broadspectrum of unrela ted noneconornic subjectson the m ass of man and society. "5 H e advo-cates a powerfu l democrat ic s ta te to lookafter general welfare, leaving business topursue i ts main object ive of mater ia l gainswithin l imits of everyday civili ty.

The objections to social responsibili ty aremeaningfu l . Indeed , many dangers awai t asbus iness moves in to untrodden areas ofsocial responsibili ty. The fallacy of theseobject ions is that they are usual ly based onan economic model of pure compet i t ion inwhich market forces leave bus iness theoret-ica l ly wi thout any socia l power and , hence,no respons ib i li ty (a b alanced zero equa-t ion ) . This zero equat ion of no power and norespons ib i l i ty i s a proper theoret ica l modelfor pure compet i t ion , bu t i t i s theory onlyand is inconsis tent with the power reali t iesof modern organizations. They possess suchgreat init iative, econom ic assets, and pow erthat their actions do have social effects . Inreality, therefore, the "no responsibili ty"doctrine assumes that business will keepsome of i t s socia l power but wi l l no t worryabo ut social responsibility.

At the o ther ex treme, some persons wou ld*Milton Friedman, Capitalism and Freedom(Chicago, Il l.: University of Chicago Press, 1962),p. 133.Theodore Levitt, "The Dangers of Social Re-sponsibility," Harvard Business Revie w (September-October, 1958), p. 44.

have business assume responsibili t ies as asort of social godfather, looking after wid-ows, orphans, public health, juvenile delin-quency, or any other social need, s implybecause bus iness has large economic re-sources. This position overlooks the fac t thatbusiness operates in a pluralis tic society,which has other insti tutions available toserve people in these areas . Business is oneof many centers of init iative in the socialsystem; hence, no ne ed exis ts to mak e it amonol i th ic d ispenser of welfare , overshad-owing the s tate as i t cares for everyone'sproblems. The "total responsibili ty" doctrinealso confuses business 's function of serviceto socie ty wi th serv i tude to society. Workers ,investors , and others participate in a busi-ness as f ree men-not as s laves of socie ty .They have their own lives to l ive, and busi-ness is their cooperative venture for fulf i l l-ing thei r own needs (pr ivate needs ) whi leserv ing o thers (publ ic needs ) .

The "no responsibili ty" and the "total re-sponsibili ty" doctrines are equally false.According to the f irs t doctr ine, businesskeeps i t s power but accepts no respons i -b i l i ty , thereby unbalancing the power-respons ib i l i ty equat ion . Accord ing to thesecond doctrine, responsibili ty far exceedspower , again unbalancing the equat ion .THE IRON LAW OF RESPONSIBILITYIf business social responsibili t ies could beavoided or reduced to insignificance, busi-ness would be re leased f rom a heavy burden ,Social responsibili t ies are diff icult to deter-mine and apply. Their relationships are com-plex. If the complexities of social responsi-bili ty could be avoided, business decis ionswould cer ta inly be eas ier to make. B ut whatare the consequences of responsibili ty avoid-ance? If responsibili ty arises from pow er,then the two condi t ions tend to s tay in bal -ance over the long run , and the avoidance ofsocial responsibili ty leads to gradual erosionof social power. This is the Iron Law of Re-sponsibili ty: Those who do not take respon-sibi l i ty for their power, ul t imately shall loseit. 6 I ts long-run application to man's insti tu-

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t ions certainly stands confirmed by history,though the " long run" may requi re decadesor eve n centuries in some instances.

As i t applies to business, the Iron Law ofResponsibil i ty insists that to the extent busi-nessmen do not accept social-responsibil i tyobligations as the y arise, other groups even-tually wil l step in to assume those respon-sibil i t ies. This prediet ion of diluted socialpowe r is not a normat ive s ta tement of whatI think should happen. Rather, i t is a pre-d ic t ion of what will tend to happen when-ever businessmen do not keep thei r socia lresponsibil i t ies ap proxima tely equal to theirsocial power. An early study of businesssocial responsibil i t ies pre sent ed this id ea asfollows, "And i t is becoming increasinglyobvious that a freedom of choice and dele-gat ion of power such as businessmen exer-c ise would hardly be permi t ted to co nt inuewitho ut some a ssumption of social resporrsi-bility."7

History supports the mutual i ty of powerand responsibil i ty in business. Take safeworking condi t ions as an example . Underthe protect ion of common law, employersduring the n ineteenth century gave minorat tent ion to worker safe ty . Early in thetwent ie th century , in the face of pressurefrom safe ty and workmen 's compensat ionlaws, employers changed thei r a t t i tudes toaccept responsibil i ty for job safety. Sincethen, very few rest r ic t ions have been im-posed on business power in this area becausebusiness in general has been acting respon-sib ly . Accident rates have b een r educe d dra-matically unti l the workplace is safer thanmost areas aw ay from work.

For an opposite example, consider unem-ployme nt. Business in the first quarte r of thiscentury re maine d cal lous about technologi-cal and market layoff. As a result , businesslost some of i t s power to government , whichadminis ters unemployment compensat ion ,and to unions, which restrict business by

6 Keith Davis and Robert L. Blomstrom, Businessand i ts Env ironm ent (New York: McGraw-Hil l BookCompany, 1966), p. 174.7 Howard R. Bowen, Social Responsibilities of theBus inessman (New York: Harper a nd Row, Pub-lishers, 1953), p. 4.

means o f t ight seniori ty clauses, supplemen-ta l unemplo ymen t benefit s , and o the r means.Now business finds i tself in the posit ion ofpaying unemployment costs i t or ig inal lydenied responsibil i ty for, but having lesscontrol than when i t did not payI Businesspower has dra ined a way to bring the power-responsibil ty equation back into balance.

Consider a lso the equat ion in terms of acu r ren t p rob lem-ga in fu l employmen t o fo lder workers . The p l ight of workers in theover-45 age bracket is well-known. Despitepubl ic pronouncements of in terest in themand despite their general employabil i ty,man y of them find job opportuni t ies l imi tedor even nonexistent . At this t ime the powerof initiative is still substantially with busi-ness, but i t is beng gradually eroded by fairemploym ent practice laws. W ill man age-ment s top th is erosion by taking more re-sponsibil i ty? I do no t know, but in any casethe power-responsibil i ty equation gradually,but surely, finds i ts balance.

I believe that the logic of balancedpower and responsibil i ty is a useful modelfor understanding the social-responsibil i tydi lemma in which business managers exis ttoday. And the Iron Law of Responsibil i tyoffers the historical imperative that socialresponsib i li ty must be balanced w i th powe rin the long course of business history. Mor especifically, in the operating areas wheresocial power exists, social responsibilityexists also-and in approximately the sameamount .

Social responsibility is expressed in law,custom, and inst i tut ional agreements thatdefine condit ions for responsible use ofpower, but , more important for our pur-poses, it is expressed in responsible self-regula t ion by informed, mature managerswho understand the socia l system in whichthey operate . Managers are the long-run keyto effective social responsibility by businessinst i tut ions. With social ly competent man-agers, we can have a social ly competentbusiness system and the product iv i ty andhuman fulfi l lment that successful businesscan bring.

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Davis Keith Understanding the RSC

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