To Distribute Or Not to Distribute Profits Among Stakeholders, That Is the Question!

To distribute or not to distribute profits among stakeholders, that is the question!

Introduction

People usually start a business to make some profit. When they make a profit, all the stakeholders associated with the operations of that business are affected. The stakeholders in a business are not only the shareholders but employees, suppliers, customers and ultimately the whole of the society in some cases (Sloman et al., 2010). Therefore, a business has the potential to work for the betterment of the community in which it operates and make the society better. In other words, a business can benefit stakeholders other than the owners (Lee 2005).

Milton Friedman asserts that the only responsibility for a business is to increase its profits (Friedman 1970). But besides making profit, some businesses have other objectives too. Other objectives can include, but are not limited to, providing growth opportunities for employees, building and supporting the communities in which they operate and, providing employment. Hornby’s research indicates that most firms, out of the pool of his selected firms, had multiple goals and perhaps with a minimum profit requirement (Hinde 2011). Therefore, it can be assumed that business may have other goals beside profit maximization.

A business solely absorbed in increasing its profits without a wider outlook, which take care of these other social responsibilities, is rarely a successful business (Kay 1998). Firms also have a moral commitment to work for the betterment of society (Reinhardt et al., 2008, p 28). One way to redistribute potential profits in stakeholders other than the owners is to engage in the initiatives fulfilling the social responsibility of a firm. These are called corporate social responsibility (CSR) activities.

CSR was identified, in academia, as a new paradigm for business about 35 years ago (Wartick & Cochran, 1985). CSR activities are referred to initiatives taken by a firm, for their employees, communities and their environment, which are beyond what is legally required of a firm (Barnea and Rubin 2010). Today, majority of the annual financial reports of companies, in varied sectors, contain a section explaining company’s CSR activities.

When a firm is socially responsible, it takes the interest of community into consideration rather than just safe guarding the interests of its immediate stakeholders (Sloman et al. 2010 p430). There are two views to social responsibility. Classical view is that a firm should only concentrate on creating wealth for stakeholders by following relevant laws (Greenfield 2004). The Socioeconomic view is that a firm has other responsibilities too, besides making money, for example ethical, moral, social and legal, towards the environment in which it operates (Hancock 2005).

Margolis, Elfenbein, and Walsh (2007) suggest that there is little relationship between CSR initiatives of a firm and its profitability. Still, the research indicates that redistribution of profits to stakeholders other than owners, using the CSR activities, has increased in the last ten years.

Why are companies redistributing profits to stakeholders other than owners, by taking part in CSR activities, when research indicates little relationship between firm’s CSR activities and its profitability and Friedman asserts that the only responsibility of a business is to solely increase its profits?

The world in 2013

In today’s world, taking care of human resource is the key to business success (Guest et al. 2003). One way to take care of human resource is to redistribute potential profit of the company in them. Employees can be given ownership stake which increases employee’s favorable attitude towards the company and increases employee motivation to perform (Perotin and Robinson 2003). Some firms also invest some part of their profits in educating and training their employees. This makes workforce happy, and if the workforce is happy, it can play a critical role in sustaining the competitive advantage of firm. Sustained competitive advantage of the firm will increase the value creation process for all the stakeholders.

When profits are used on stakeholders other than owners, for example in the activities for the betterment of the community, some employees take pride that part of the profit they earned is invested and used in socially responsible activities (Reinhardt, Stavins and Vietor 2008). This makes employees believe that they are engaged in a meaningful work. In Firms of Endearment (Sisodia, Wolfe, & Sheth, 2007), the authors make a compelling case that people search for higher meaning and when they engage in a meaningful work, they are more motivated and loyal to the company. Csikszentmihalyi (2003) states that when people engage in some meaningful work, they enter in a flow state through which they are more creative and productive, which leads them to achieve superior results. This increased motivation further helps the firm to sustain its competitive advantage.

A firm which takes part in CSR earns good reputation in the society and this enhances firm’s brand image. This positive brand image helps the firm in recruiting more talented people because they feel good in working with the companies who are not just investing money in their owners but also in other stakeholders for example in the welfare of their local communities. Models like Virtue Matrix (Martin 2002) provide firms with a framework which they can use to enrich the societies they operate in. An article by Willard (2002) states that companies which are good corporate citizens in turn attracts the best employees, increases retention of top talent, and increases employee productivity. In another study, a number of students applying for graduate employments schemes have indicated their preparedness in working for a business which is socially responsible even on a lower salary (Sloman et al. 2010. P437).

Conclusion

Research also indicates that firms profit invested while being socially responsible also “makes a difference” to the society (Rivoli 2003, p 271). This concludes that it is in the interest of the firm to distribute its profits in stakeholders other than owners as it brings varied benefits to the business and the society and is profitable too. Favourable brand image and decreased cost of hiring because of reduced employee turnover are few of the many advantages. Firms should make sure that they take care of any possible principal/agent issue while allocating resources for CSR initiatives (Butler and McChesney 1999) because allowing managers to allocate funds gives them substantial discretion which can tempt them to use these resources for personal gains (Reinhardt et al. 2008 p 29).

BIBLIOGRAPHY

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4. If trade is meant to be an ‘engine for growth’, why do countries adopt protectionist measures? Critically examine whether they are correct to do so.

In the second decade of twenty first century, the possibility is that the world trade will increase as a percentage of world’s GDP. This increased trade is good for the welfare of the world on the whole but the more the countries trade among themselves, the more interdependent they become. This increased interdependency also increases the vulnerability of countries to any possible fluctuations in the world trade (Sloman et al. 2010 p724). Countries with highly specialized economies can also become vulnerable to world trade market fluctuations if they do not diversify their products.

To decrease the impact of these possible vulnerabilities, countries devise their economic policies. In these policies, governments sometimes adopt some trade protectionist measures. The biggest reversal in trade between countries in recent times is not because of increased transportation costs but because of increased protectionist measures which countries have adopted (Jacks, Meissner and Novy 2008).

If a country protects itself for example by imposing restriction on products from a country, it may face retaliation from that country which may result in a loss for everyone involved. And if countries try to protect their own industries, the Nash equilibrium is that the whole world is worse off as trade will decline (Sloman et al. 2010 p540). In this backdrop and equipped with the knowledge that free trade is superior on the grounds of efficiency, as it can bring benefits to all of the countries, governments still adopt protectionist measures (Yoffie and Milner 1989 p111). One possible reason of adopting protectionist measures is that every country has its own agenda and has its own interests to watch. Even though world trade organization (WTO) is powerful, the member countries are not always willing to follow restrictions if they believe to gain from them by not following (Sloman et al. 2010 p541). This is true even when the rules devised by WTO are not implemented but chalked out with the consensus of the member countries.

Protectionist activities have side-effects and governments should always seek to review the costs against the possible benefits of implementing protectionism (Sloman et al. p535) as trade protectionist measures may also affect the economic activity and economic growth in a country. That is one reason why Yoffie and Milner (1989) suggest that governments should identify the industries in the economy which will provide a net gain in the long run and then protect them. They call this strategic trade policy.

Sometimes, countries impose restrictions on trade if they want to promote a specific industry in their economy. For example, if they do not protect their infant industry, it will not be able to take the challenges of established competing firms from other countries in a free trade environment. The possible reason of not rising up to the occasion and competing with the foreign companies head on can be that the industry is too young to develop its competitive advantage muscle powered with sophisticated infrastructure which competition might already have developed over the years. If government protects this industry from foreign competition, with time it can gain competitive advantage. But government should also consider that a lack of competition may also hider the growth process of infant industry. Therefore, government should remove protection once the industry has achieved competitive advantage so it can compete internationally (Sloman et al. 2010 p531).

It should be noted that governments that go for such protectionist measures usually do not have many global supply chains in protected industry. The problem with this approach is that it is very hard for a government to identify a correct industry which has the potential to achieve competitive advantage with protectionist measures or subsidies. If wrong infant industry is identified as a potential future industry with a competitive advantage, it might never be able to achieve competitive advantage because of its wrong selection.

Sometimes it is not good for countries to adopt protectionist approach especially in the context of globalization of production mechanisms which took place in the last decade. It is in the interest of global firms to remain in free trade as protectionism might raise their costs and undermine their competitive advantage (Evenett, Hoekman and Cattaneo 2009).

When a government adopts protectionist measures, the cost of a product increases and the consumer would pay more for a good which he would pay in a free trade economy. Tariffs and quotas are introduced to provide a domestic industry protection and buy some time for the firm to favorably achieve competitive advantage. In today’s world, it might not be the best approach when individuals can buy any product of their choice from anywhere in the world where internet is available. This free trade transmits growth and prosperity between countries whereas protectionist measures usually diminish the welfare gains of free trade (Lehmann and O’Rourke 2011 p606).