Sunday, December 04, 2011

Profit Maximization and Corporate Social Responsibility

Dari tugas kuliah saya:
Firms and profit maximization
Firms are formed by the shareholders, which mandates the firm’s management to manager. Manager work in the firm for the shareholder. Thus, managers are agents of the shareholders  and should act, as a manager, for the best interest of shareholders. Managers’ primary responsibility is to their shareholders[1].
Economics theory suggests that shareholder’s mandate is to gain profit. The assertion seems reasonable: if people with money would like to do other things, i.e they desire for a revolution in current administration, they would be better in forming a political party/organization instead of a company.
If the mandate is gaining profit, then the more the profit, the better managers in performing his responsibility to shareholders. Therefore, firms are in business to maximize profits. Profit maximization is the output level at which the firm generates the highest profit.[2] Mathematically, profit maximization is when Marginal Cost = Marginal Revenue (MC = MR)[3].
Corporate Social Responsibility
Corporate Social Responsibility (CSR) is a business approach that contributes to sustainable development by delivering economic, social and environmental benefits for all stakeholders[4]. Kotler & Lee (2005) defines CSR as “a commitment to improve community well-being through discretionary business practice and contributions of corporate resources”[5].
Basic concept of CSR is a way to operate business that not only consider profit for firm’s shareholders, but also benefit for firm’s stakeholders. There are various stakeholders of a company aside of shareholders (governments, employees, customers, suppliers, community, trade unions), and CSR suggests that corporate should opt (not forced by law, moral or ethical by nature[6]) to use its own resources to improve other stakeholders beside the shareholders. Therefore, in managing their firms, managers should also take into account environmental and social factor, and do something to improve them in sustainable way.
CSR and Profit Maximization
Profit maximization conveys that firms should operate to maximize profit for shareholders, while CSR suggests that firms improve their stakeholders. Meanwhile, firms has limited resources, and if some of these resources are used deliberately for purpose other than generation of firm’s profit, then firms must sacrifice its attainable profit (potential profit)  to environmental and social benefit.
Adopting CSR as primary objective of a firm on top of profit maximization can make the firm (1) fail in achieving their potential total revenue, because resources that firms have are shared for other’s objective, and not fully employed to generate maximal revenue, (2) add unnecessary cost (for activity relates to other stakeholders), thus total cost is increased more than it is supposed-to-be. Since Profit = Total Revenue – Total Cost, then if condition number (1) or (2) (or both) happens, profit will be lower and not maximized. Hence, profit maximization is unlikely aligned with CSR.

[1] Friedman, Milton.  “The Social Responsibility of Business Is To Increase Its Profits,” The New York Times Magazine, Sept. 13, 1970, No. 33, pp. 122-26. via accessed on November 26, 2011
[2] Begg, David and Ward, Damian. “Economics for Business, third edition,” McGraw Hill Higher Education, 2009, p. 96 & 99.
[3] Proof: If π = Total Revenue – Total Cost, marginal profit dπ/dQ = dTR/dQ – dTC/dQ is maximised when dπ/dQ =0, then dTR/dQ = dTC/dQ or Marginal Revenue = Marginal Cost.
[4] Financial Times Lexicon, “Corporate Social Responsibility CSR,”  accessed November 28, 2011.
[5] Kotler, Philip and Lee, Nancy. “Corporate Social Responsibility, Doing the Most Good for Your Company and Your Cause,” John Wiley & Sons, 2005, p.3.
[6] Ibid, p.3

Karena terbatas jumlah kata, jadi kurang elaborate (ngeles...;p).

Namun, gimana dengan CSR yg nyata-nyatanya profitable? Starbucks yg lakukan fair trade dgn petani kopi, atau bodyshop, atau 3M yg kurangi polusi tapi malah nambah profit?

Well, di kasus-kasus itu, bukan CSR yg di atas profit maximization, tapi upaya CSR sebagai diferensiasi, thus, *menambah total revenue* atau *mengurangi total cost*. Starbucks & Bodyshop charge a premium in their price. Usaha "CSR" 3M memang mengurangi biaya yang sejalan dengan mengurangi polusi. Teteup profit maximization.

Bagaimana dengan social business? Mandat shareholders-nya beda. Benefit masyarakat di atas profit :).

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