Financial Reporting and Ethics - The Institute of Chartered ...

FINANCIAL REPORTING AND ETHICS12.2.3 Background and Debate in Corporate Social ResponsibilityAdolph A. Berle in a debate published in the Harvard Law Review in1932 argued that the primary purpose of business organisation orcorporation should be to make money for its shareholders. According tohim, “All powers granted to a corporation or to any group within thecorporation are at all times exercisable only for the ratable benefits ofall the shareholders as their interest appears.”In 1970, Friedman Milton published a short essay ‘The SocialResponsibility of Business is to increase its profits’ The New York TimesMagazine, September 13, 1970, which has generated a lot of controversyever since. In his argument corporations should pursue their economicself interest. He held in the essay that there is one and only one socialresponsibility of business, which is to use its resources and engage inactivities designed to maximise profits for the shareholders. Accordingto him, “...a corporate executive is an employee of the owners of thebusiness. He has direct responsibility to his employers. Thatresponsibility is to conduct the business in accordance with their desires,which generally will be to make as much money as possible….”He went further to posit that any attempt to promote corporate socialresponsibility, however it might be defined, amounts to moral wrong.Friedman questioned the logic of corporate social responsibility as ithad developed. He insisted that in a democratic society, governmentwas the only legitimate vehicle for addressing social concerns. Thusthe function of business in a society, which is to maximise profits, shouldnot be confused with other social functions performed by governments,institutions and charities.Friedman and others co represent the shareholder theory which claimsthat the purpose of the firm is to maximise the welfare of theshareholders, perhaps subject to some moral or social constraints. Thereason for this, Frederick Hayek in 1969 wrote is that the organisationsare the private properties of the shareholders thus; every businessorganisation or corporation must aim at maximising profits to enhanceshareholders value. And by the organisations pursuing their selfinterestswould ensure the most efficient economic activities andoutcomes. Hayek goes further to argue that shareholders’ property rightsin the corporation must be fully protected and their control of thecorporation strengthened. This position implies that the shareholdersare the only legal stakeholders of any organisation because of theirinvestment, which also makes the corporation their private property.Central to this theory is the belief that the managers have a fiduciaryduty to act in the interest of the shareholders to maximise the return oninvestment, with no direct concern to the well-being of the society248