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tion posed is whether s corporations should be solely profit oriented, or should corpora- tions balance their economic and financial prerogatives with social welfare objectives? In this respect, is it meaningful to assign ethical and social responsibilities to corpo- rations?

Earlier discussions on the social respon- sibility of businesses, which developed in the USA, are usually associated with the views of Friedman. Friedman proposed that ‘the social responsibility of business is to increase its profits’ and thus defined a so- cially responsible business as one which ‘uses its resources and engages in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competi- tion without deception or fraud’.

In other words, Friedman believed that the financial priorities, whilst undertaken within the framework of the law and ethics, should rank as the prime concern of a business. To this end, he asserted that the social benefit of the business would be in terms of its con- tribution in the creation of wealth and em- ployment. Moral responsibilities, in terms of charitable activities, were not perceived by Friedman as part of the objectives of a busi- ness. His reasoning was based on three key premises:

• moral responsibilities are to be as- signed only to individuals and in this case the corporate executives, not the corporation which is considered an in- dependent legal entity; • it is the management’s fiduciary re- sponsibility to protect the interests of shareholders and increase their wealth rather than giving it away through overt charitable activities; • social issues should be addressed by the State rather than be the prerogative

of corporate executives who are neither trained to set and achieve social goals nor democratically elected to do so.

Friedman’s position that corporations should pursue profits and work to increase share- holders’ value has been associated with the worldview of neo-classical economics which is motivated by the self-interest principle as opposed to a concern for the social interest. His argument is also referred to as the ‘effi- ciency’ view of CSR or the ‘economic model’ of CSR.

Others, such as Sethi, Carroll, Wartick, Wood and Cochran–believed that businesses can simultaneously seek to be philanthropic or society-concerned while maintaining a prof- it-seeking strategy. The best practice, ac- cording to this viewpoint, is not merely the maximisation of profits, economic efficiency or fair dealing. Rather, it is about businesses endeavouring to uphold the moral standards acceptable to society and fulfilling their re- sponsibilities towards the general commu- nity.

The model of CSR has therefore progressed from the ‘economic’ to a ‘social’ model–or, in other words, from a shareholder-centric to a stakeholder-centric model–whereby not only the benefits of the corporation are sought but also those of the stakeholders, including shareholders and the larger society.

Several theoretical explanations have been put forward in the literature which set the foundational basis for firms to embrace a socially responsible approach which extends beyond profit maximisation. The social con- tract theory, for instance, establishes a for- mal or explicit relationship between society and businesses in the form of compliance with laws, regulations, rules and procedures; such relationship may also be informal or implicit in the form of adoption of commonly

Figure 1: Dimensions and Impacts of CSR

Product Market Labour Market Capital Market

Responsible Business Practices

In terms of

labour standards, good corporate governance, transparent reporting

Sustainable Enterprise In terms of

economic, social and environmental implications

Consumer Responsi- bility

In terms of ethical

sources, products, mar- keting, distribution

Source: author’s own 46 Global Islamic Finance April 2012 Corporate Philanthropy

In terms of charitable activities, community

involvement and devel- opment

accepted traditions. The explicit or implicit contracts provide a reference point to busi- nesses with regard to society’s expectations of them.

Wood’s put forward three propositions that could be used to explain the motivations for businesses to abide by social contracts:

• the ‘principle of institutional legitima- cy’; • the ‘principle of public responsibility’; and

• the ‘principle of managerial discretion’.

According to the ‘principle of institutional le- gitimacy’, legitimacy and power are granted to businesses by society such that business institutions are expected to use this power in a socially responsible way. Those who abuse this power will otherwise tend to lose their ‘license to operate’ in the long run.

Preston and Post added that socially respon- sible behaviour is expected of firms because they exist and operate in a shared environ- ment. The ‘principle of public responsibility’, on the other hand, argues that business organisations are responsible for the out- comes related to their primary and second- ary areas of societal involvement.

To this end, they are deemed responsible for solving problems they have caused and those related to their business operations and interests. Lastly, the ‘principle of mana- gerial discretion’ focuses on the discretion possessed by managers as moral actors to promote socially responsible outcomes and not to shun their responsibility ‘through ref- erence to rules, policies, or procedures’.

In any case, it is found that firms are mo- tivated to act responsibly for reasons like safeguard of their reputation and attracting investment. In fact, several studies have re-

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