The main issue behind corporations being reluctant to involve themselves in anything beyond the immediate scope of their operational responsibilities is, of course, money. Spending on projects and activities not immediately within the corporation’s scope of operations lowers the profit margins, thus reducing the corporation’s value with its stockholders. This goes against the first definition of Friedman’s stockholder theory, which states that the foremost social responsibility of the corporation is to increase its profits. The same theory, however, emphasizes the importance of approaching the achievement of high profit margins from the long-term rather than short-term position, which brings in Freeman’s stakeholder theory and shows that, to be successful, corporation must have certain responsibilities to the environment – both social and physical – within which it operates.
No company operates in a vacuum. The revenues are produced from selling products and services, which in turn require suppliers and employees to create. The corporation, therefore, depends on the economic and social well being of the community where it is located, as well as the communities where its suppliers are located, for its success. People within these communities are vital to the corporation’s survival, and when it comes to suppliers, stockholders, and employees, the success of the company is, in turn, often vital to their own success. Those are the people Freeman categorizes as “stakeholders.” To maintain that the corporation’s only social responsibility is to the stockholders is to ignore the fact that profit increases can be achieved not only by cutting spending, but also by increasing revenue. It also ignores such an important aspect of the operational process as goodwill, which is equally important to obtain from customers, employees, stockholders, suppliers, local community, and others who, according to Freeman, are “vitally concerned.”
Contributing to the well being of the community within which the corporation is located is important because it has the potential to increase this community’s purchasing capacity, which in turn can translate into additional revenue for the corporation. For example, donating vital supplies for local schools frees up more money for parents to spend. Offering a scholarship for young people within the community to attend a local college stimulates revenue production for that particular educational institution and increases long-term earning potential for bright, intelligent young individuals within the community. Combined with employment commitment, such scholarship might provide the corporation with valuable and loyal human resources, which in turn has the potential to increase productivity and decrease spending on hiring and training people for the workforce.
Ensuring the health of the physical environment within the community also has the effect of potentially increasing the spending threshold for the local population by decreasing their spending on health care. Ensuring that the interests and needs of the corporation’s workforce are met helps increase productivity and decrease turnover, which in turn leads to increase in revenue and decrease in spending on recruiting, hiring, and training new employees. In addition, all of the aforementioned examples increase the company’s goodwill within the community, which can be a significant competitive advantage if there is another business entity within the same community providing similar products and/or services.
The examples given above show the interdependence of the corporation and the people with whom it interacts on various levels in its operational process. Ignoring this interdependence for the sake of immediate profit-generating ignores the tenets of both the stakeholder and stockholder theories. In the first case, it is unlikely to give equal consideration to legitimate interests of all stakeholders in achieving the said profits. In the second case, it does not take into account the need to produce long-term profits; the ability of the corporation to do so may be undermined by practices that hurt the community through unnecessary spending cuts to achieve short-term profits.
For large, multinational corporations, it is equally important to have certain responsibilities not only beyond the stockholder theory’s profit generating capacity, but also beyond the immediate community within which the company’s main, or bulk of, operations are located. It is just as essential for the corporation’s well being to ensure that its suppliers and affiliates operate within an environment that stimulates potential growth and goodwill. In fact, in the modern global economy, where supply often is significantly larger than demand, and competition in many marketplaces is intense not only for customers, but also for resources, generating large amounts of goodwill – and, through it, customer loyalty and favorable considerations from people with political and administrative influence – could be among the most important determining factors for the corporation’s success.