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Social Responsibility of Business and Business Ethics

NCERT Class 11 · Business Studies Based on NCERT Class 11 Business Studies textbook · Free CBSE study kit

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Chapter Notes

Overview
This chapter explores the concept of social responsibility of business, arguing that enterprises must go beyond profit maximisation to serve society. It examines the arguments for and against social responsibility, the specific responsibilities towards different interest groups (shareholders, workers, consumers, government, and community), and the critical role of business in environmental protection. The one big idea is that ethical and socially responsible behaviour is not just a moral duty but a strategic necessity for long-term business success and durable profitability.
Key Concepts (15)
Social Responsibility of Business
The obligation of business to take those decisions and perform those actions which are desirable in terms of the objectives and values of our society.
e.g. A company installing pollution control devices in its factory even when not legally required to do so, to protect the local community's health.
Legal Responsibility
The obligation of a business to operate within the laws of the land; mere compliance with the law.
e.g. A company paying all its taxes on time as per the Income Tax Act.
Business Ethics
The socially determined moral principles which should govern business activities.
e.g. A shopkeeper using fair weights and charging fair prices from all customers without discrimination.
Corporate Social Responsibility (CSR)
As per the Companies Act 2013, CSR is the responsibility of enterprises for their impacts on society, requiring companies with specified turnover, net worth, or profit to spend at least 2% of their average net profit on CSR activities.
e.g. A company with a net profit of Rs. 500 crore spending Rs. 10 crore on building schools in rural areas.
Environment
The totality of man’s surroundings — both natural and man-made — including resources like land, water, air, fauna, flora, raw materials, cultural heritage, and socio-economic institutions.
e.g. The air we breathe, the rivers, forests, and also the buildings and roads in a city.
Pollution
The injection of harmful substances into the environment, largely the result of industrial production, which changes the physical, chemical, and biological characteristics of air, land, and water.
e.g. A factory releasing toxic chemicals into a river, causing water pollution.
Air Pollution
The result of a combination of factors which lowers air quality, mainly due to carbon monoxide from automobiles and smoke/chemicals from manufacturing plants.
e.g. Smoke from a thermal power plant causing respiratory problems in nearby residents.
Water Pollution
Pollution caused primarily from chemical and waste dumping into rivers, streams, and lakes, posing a serious threat to human life and aquatic animals.
e.g. Industrial effluents from a textile mill being dumped into the Ganga river.
Land Pollution
Pollution caused by dumping of toxic wastes on land, damaging its quality and making it unfit for agriculture or plantation.
e.g. Dumping of e-waste from a factory on open ground, making the soil infertile.
Noise Pollution
Pollution caused by the running of factories and vehicles, which is a serious health hazard responsible for diseases like loss of hearing, heart malfunction, and mental disorder.
e.g. Constant honking of vehicles and machinery noise in a busy industrial area.
Economic Responsibility
The primary social responsibility of a business to produce goods and services that society wants and sell them at a profit.
e.g. A bakery producing fresh bread and selling it at a price that covers costs and earns a reasonable profit.
Ethical Responsibility
The behaviour of the firm that is expected by society but not codified in law, involving voluntary action.
e.g. A company respecting religious sentiments while advertising its products, even though no law requires it.
Discretionary Responsibility
Purely voluntary obligations that an enterprise assumes, such as charitable contributions or helping during natural disasters.
e.g. A company donating funds to build a school in an underprivileged area.
Code of Ethics
A written document defining the principles of conduct for the whole organisation, covering areas like honesty, product safety, workplace health, and financial reporting.
e.g. A company's employee handbook stating that accepting gifts from suppliers is prohibited.
Caveat Emptor
A Latin phrase meaning 'let the buyer beware', which has been substituted by the principle of 'customer is king' in modern business.
e.g. Earlier, a buyer had to check product quality themselves; now, the seller is responsible for providing accurate information.
How It Works
Arguments for Social Responsibility
  1. Step 1: Justification for existence and growth — Business exists to serve society, and profit is an outcome of service.
  2. Step 2: Long-term interest of the firm — Serving society builds a positive image and ensures continued cooperation from stakeholders.
  3. Step 3: Avoidance of government regulation — Voluntary social responsibility reduces the need for new laws.
  4. Step 4: Maintenance of society — Addressing social issues prevents anti-social activities that harm business.
  5. Step 5: Availability of resources with business — Business has financial and human resources to solve social problems.
  6. Step 6: Converting problems into opportunities — Business can turn social challenges into profitable ventures.
  7. Step 7: Better environment for doing business — A healthy society provides a better operating environment.
  8. Step 8: Holding business responsible for social problems — Business has a moral obligation to solve problems it created or perpetuated.
💡 Students often forget the 'long-term interest' and 'avoidance of government regulation' arguments — these are frequently tested in board exams.
Arguments against Social Responsibility
  1. Step 1: Violation of profit maximisation objective — Business exists only for profit; social responsibility conflicts with this.
  2. Step 2: Burden on consumers — Costs of social responsibility are passed on to consumers through higher prices.
  3. Step 3: Lack of social skills — Businessmen lack the understanding and training to solve social problems.
  4. Step 4: Lack of broad public support — The public does not like business involvement in social programmes.
💡 The 'burden on consumers' argument is a common trap — students must explain that costs are shifted, not absorbed by the business.
Reality of Social Responsibility (Forces compelling business)
  1. Step 1: Threat of public regulation — Governments regulate irresponsible businesses to safeguard public interest.
  2. Step 2: Pressure of labour movement — Educated and organised labour forces businesses to care for worker welfare.
  3. Step 3: Impact of consumer consciousness — Educated consumers demand their rights, replacing 'caveat emptor' with 'customer is king'.
  4. Step 4: Development of social standards for business — Society now judges business by its social contribution, not just profit.
  5. Step 5: Development of business education — Educated stakeholders are more sensitive to social issues.
  6. Step 6: Relationship between social interest and business interest — Long-term business benefit lies in serving society well.
  7. Step 7: Development of professional managerial class — Professional managers focus on satisfying multiple interest groups, not just profit.
💡 This is a high-weight topic — students must be able to list at least 4-5 forces with brief explanations.
Steps for Environmental Protection by Business
  1. Step 1: Top management commitment to create a work culture for environmental protection.
  2. Step 2: Ensure commitment is shared throughout the enterprise by all divisions and employees.
  3. Step 3: Develop clear policies for purchasing quality raw materials, using superior technology, and scientific waste treatment.
  4. Step 4: Comply with government laws and regulations for pollution prevention.
  5. Step 5: Participate in government programmes like cleaning rivers, tree plantation, and checking deforestation.
  6. Step 6: Periodically assess pollution control programmes in terms of costs and benefits.
  7. Step 7: Arrange educational workshops and training for suppliers, dealers, and customers to involve them in pollution control.
💡 Students often miss the 'periodical assessment' and 'educational workshops' steps — these are specific and testable.
Elements of Business Ethics
  1. Step 1: Top management commitment — CEO and higher-level managers must be openly committed to ethical conduct.
  2. Step 2: Publication of a 'Code' — Define principles of conduct in a written document covering honesty, product safety, workplace health, etc.
  3. Step 3: Establishment of compliance mechanisms — Ensure decisions comply with ethical standards through training, auditing, and reporting systems.
  4. Step 4: Involving employees at all levels — Employees implement ethics policies, so their involvement is essential.
  5. Step 5: Measuring results — Audit to monitor compliance and discuss results for further action.
💡 The 'publication of a Code' and 'compliance mechanisms' are often confused — code is the document, mechanisms are the systems to enforce it.
Exam Traps — Don't Make These Mistakes
⚠ Confusing Social Responsibility with Legal Responsibility
✗ Social responsibility is the same as legal responsibility — both mean following the law.
→ Social responsibility is broader than legal responsibility. Legal responsibility is mere compliance with law, while social responsibility includes voluntary actions not covered by law.
✓ Social responsibility involves an element of voluntary action for the benefit of society, beyond what is required by law.
⚠ Mixing up Arguments For and Against Social Responsibility
✗ One argument against social responsibility is that it helps in long-term profit maximisation.
→ Long-term profit maximisation is an argument FOR social responsibility, not against it. Arguments against include violation of profit maximisation, burden on consumers, lack of social skills, and lack of public support.
✓ Arguments against social responsibility include: violation of profit maximisation objective, burden on consumers, lack of social skills, and lack of broad public support.
⚠ Forgetting the '2%' Rule in CSR
✗ All companies must spend 2% of their profit on CSR.
→ Only companies with annual turnover of Rs. 1,000 crore or more, or net worth of Rs. 500 crore or more, or net profit of Rs. 5 crore or more are required to spend at least 2% of their average net profit of the previous three years on CSR.
✓ As per Companies Act 2013, companies meeting specified thresholds (turnover ≥ Rs. 1,000 crore, net worth ≥ Rs. 500 crore, or net profit ≥ Rs. 5 crore) must spend at least 2% of their average net profit of the previous three years on CSR activities.
⚠ Confusing Ethical Responsibility with Discretionary Responsibility
✗ Ethical responsibility includes charitable donations to educational institutions.
→ Charitable donations are discretionary responsibility (purely voluntary). Ethical responsibility involves behaviour expected by society but not codified in law, such as respecting religious sentiments in advertising.
✓ Ethical responsibility refers to behaviour expected by society but not codified in law, e.g., respecting religious sentiments in advertising. Discretionary responsibility refers to purely voluntary obligations, e.g., charitable contributions.
⚠ Listing Causes of Pollution Incorrectly
✗ The main causes of pollution are air, water, land, and noise pollution.
→ Air, water, land, and noise are TYPES of pollution, not causes. The causes are the release of pollutants (like carbon monoxide, chemicals, toxic wastes, and noise) into the environment beyond its assimilation capacity.
✓ Pollution is caused by pollutants released into the environment beyond its assimilation capacity. Types of pollution include air pollution (from carbon monoxide and smoke), water pollution (from chemical and waste dumping), land pollution (from toxic waste dumping), and noise pollution (from factories and vehicles).
⚠ Omitting 'Top Management Commitment' from Elements of Business Ethics
✗ The elements of business ethics are: code of ethics, compliance mechanisms, employee involvement, and measuring results.
→ Top management commitment is the FIRST and most crucial element. Without it, other elements cannot be effectively implemented.
✓ The elements of business ethics are: (i) top management commitment, (ii) publication of a 'Code', (iii) establishment of compliance mechanisms, (iv) involving employees at all levels, and (v) measuring results.
Compare & Contrast
Scope of obligation
Social Responsibility
Legal Responsibility
Social responsibility is broader and includes voluntary actions for societal benefit beyond what is required by law, while legal responsibility is limited to mere compliance with the law.
Nature of obligation
Ethical Responsibility
Discretionary Responsibility
Ethical responsibility involves behaviour expected by society but not codified in law (e.g., respecting religious sentiments in ads), while discretionary responsibility is purely voluntary (e.g., charitable donations during floods).
Exam Focus
Marks pattern: Typically 2 MCQs (1 mark each), 1 Short Answer question (3 marks), and 1 Long Answer question (5 marks). Total: 10 marks.
Most asked: Arguments for and against social responsibility · Social responsibility towards different interest groups (shareholders, workers, consumers, government, community) · Business ethics and its elements · Corporate Social Responsibility (CSR) as per Companies Act 2013 · Need for pollution control and role of business in environmental protection
Don't skip: Long answer question on arguments for and against social responsibility (5 marks); Long answer question on social responsibility towards different interest groups (5 marks); Question on elements of business ethics (3 marks); Question on CSR provisions of Companies Act 2013 (3 marks)
One-Line Revision (read aloud before the exam)
  1. Social responsibility of business is the obligation to take decisions and actions desirable in terms of society's objectives and values.
  2. Legal responsibility is mere compliance with law, while social responsibility includes voluntary actions for societal benefit.
  3. Arguments for social responsibility include: justification for existence, long-term interest, avoidance of regulation, and availability of resources.
  4. Arguments against social responsibility include: violation of profit maximisation, burden on consumers, lack of social skills, and lack of public support.
  5. Business has social responsibilities towards shareholders (fair return), workers (fair wages), consumers (quality goods), and government/community (taxes and environment).
  6. CSR under Companies Act 2013 applies to companies with turnover ≥ Rs. 1,000 crore, net worth ≥ Rs. 500 crore, or net profit ≥ Rs. 5 crore.
  7. Eligible companies must spend at least 2% of their average net profit of the previous three years on CSR activities.
  8. Pollution is the injection of harmful substances into the environment, largely from industrial production.
  9. The four types of pollution are air, water, land, and noise pollution.
  10. Need for pollution control includes: reduction of health hazards, reduced liability risk, cost savings, improved public image, and other social benefits.
  11. Steps for environmental protection by business include top management commitment, clear policies, compliance with laws, and participation in government programmes.
  12. Business ethics refers to socially determined moral principles governing business activities.
  13. Elements of business ethics are: top management commitment, publication of a code, compliance mechanisms, employee involvement, and measuring results.
  14. Ethical business behaviour improves public image, earns trust, and leads to greater long-term success.
  15. The principle of 'caveat emptor' has been replaced by 'customer is king' in modern business.

MCQs — 10 Questions with Answers

Q1. Social responsibility of business refers to:

  • A. Obligation to take decisions and actions desirable in terms of society's objectives and values ✓
  • B. Responsibility to maximize profits for owners only
  • C. Legal compliance with government regulations alone
  • D. Charitable donations made by the company

Answer: A — Social responsibility is broader than legal compliance and includes voluntary actions for societal benefit, not just profit maximization or charity.

Q2. Which statement correctly distinguishes social responsibility from legal responsibility?

  • A. Social responsibility is legally enforceable while legal responsibility is voluntary
  • B. Legal responsibility requires only law compliance, while social responsibility includes voluntary actions beyond law ✓
  • C. Social responsibility is narrower in scope than legal responsibility
  • D. Legal responsibility covers only tax payments while social responsibility covers all business decisions

Answer: B — Social responsibility is broader and includes both legal obligations and voluntary actions for society's benefit, unlike legal responsibility which requires only compliance.

Q3. A small manufacturing company installs expensive pollution control devices even though existing laws do not require them. This action reflects:

  • A. Legal responsibility only
  • B. Social responsibility and business ethics ✓
  • C. A waste of company resources
  • D. Violation of profit maximization principle

Answer: B — Installing pollution devices beyond legal requirement is a voluntary action reflecting social responsibility towards the environment and business ethics.

Q4. Which of the following is NOT a valid argument in favour of business assuming social responsibility?

  • A. It justifies business existence by serving human needs
  • B. It increases long-term profitability through improved public image and worker cooperation
  • C. It reduces business costs and increases immediate profit margins ✓
  • D. It ensures sustainable growth and societal support for the firm

Answer: C — Social responsibility typically increases costs initially (e.g., better working conditions, pollution control), though it leads to long-term profitability, not immediate profit increases.

Q5. A company provides fair wages, safe working conditions, and skill development training to employees. This demonstrates social responsibility towards which stakeholder?

  • A. Customers only
  • B. Employees ✓
  • C. Shareholders only
  • D. Government

Answer: B — Fair wages, safe conditions, and training are direct responsibilities towards employees as they directly improve worker welfare and working environment.

Q6. Under Clause 135 of the Companies Act 2013 in India, CSR provisions are applicable to companies with which of the following criteria?

  • A. Annual turnover of ₹100 crore or more only
  • B. Net profit of ₹1 crore or more only
  • C. Annual turnover ≥ ₹1000 crore OR net worth ≥ ₹500 crore OR net profit ≥ ₹5 crore ✓
  • D. All companies regardless of size

Answer: C — CSR under the Companies Act 2013 applies to large companies meeting any one of three criteria: ₹1000 crore turnover, ₹500 crore net worth, or ₹5 crore net profit.

Q7. Mr. Sharma's textile company pays wages below minimum wage standards and uses child labour to maximize profits. Which statements are correct? (i) This violates social responsibility. (ii) This violates legal responsibility.

  • A. Both (i) and (ii) are correct ✓
  • B. (i) only is correct
  • C. (ii) only is correct
  • D. Neither (i) nor (ii) is correct

Answer: A — Child labour and below-minimum wages violate both legal responsibility (labour laws) and social responsibility (ethical obligation to treat workers fairly).

Q8. A bakery supplies bread made with partially spoilt flour to low-income customers while using fresh ingredients for wealthy customers. Which business practices are violated? (i) Social responsibility towards customers. (ii) Business ethics of honesty and transparency.

  • A. Neither (i) nor (ii) is violated
  • B. (i) only is violated
  • C. Both (i) and (ii) are violated ✓
  • D. (ii) only is violated

Answer: C — Supplying inferior products to vulnerable customers violates social responsibility (duty towards customer welfare) and business ethics (honesty and fair dealing).

Q9. A company argues that it should focus only on maximizing profits for shareholders and should not waste resources on environmental protection or community welfare. Based on modern business thinking, what is the main flaw in this argument?

  • A. Environmental protection has no connection to business sustainability
  • B. Social responsibility ensures long-term profitability and societal support, without which business cannot sustain growth ✓
  • C. Community welfare is purely a government responsibility
  • D. Shareholders do not benefit from environmental protection measures

Answer: B — Modern business philosophy recognizes that long-term profitability requires social responsibility because society withdraws support (customers, workers, government) from irresponsible firms.

Q10. Two executives debate: Executive A says 'Social responsibility costs too much and reduces profits.' Executive B responds 'Social responsibility improves company image, ensures worker loyalty, and builds customer trust, leading to higher long-term profits.' Who is correct?

  • A. Executive A is correct; short-term costs always reduce profitability
  • B. Executive B is correct; social responsibility increases long-term profitability despite short-term costs ✓
  • C. Both are equally correct as it depends on the industry
  • D. Neither is correct; social responsibility has no impact on profits

Answer: B — While social responsibility may increase short-term costs, it delivers long-term profitability through improved reputation, employee retention, customer loyalty, and reduced legal risks.

Flashcards

What is social responsibility of business?

It is the obligation of business to take decisions and perform actions desirable in terms of society's objectives and values, beyond just legal compliance.

How does social responsibility differ from legal responsibility?

Legal responsibility requires only compliance with law, while social responsibility includes voluntary actions for societal benefit even when not legally required.

Name one argument in favour of business assuming social responsibility.

Social responsibility justifies business existence by proving it serves human needs and society, ensuring long-term growth and public cooperation.

What is the relationship between business and long-term profits?

A firm maximizes long-term profits by serving society's interests because workers, customers, and government withdraw support from irresponsible businesses.

Who are the main stakeholders towards whom business has social responsibilities?

Employees, customers, suppliers, shareholders, government, and community are the main stakeholders affected by business decisions.

What are examples of socially undesirable business practices?

Manufacturing adulterated goods, deceptive advertising, tax evasion, environmental pollution, and worker exploitation are socially undesirable practices.

What does CSR in India mean under the Companies Act 2013?

CSR is governed by Clause 135 of the Companies Act 2013 and applies to companies with annual turnover ₹1000 crore, net worth ₹500 crore, or net profit ₹5 crore or more.

How does business responsibility towards environment protect society?

Installing pollution devices, using sustainable practices, and preventing environmental damage protects public health and natural resources for future generations.

What is business ethics and why does it matter?

Business ethics refers to moral principles governing business behaviour; it ensures honesty, transparency, and fair competition, building trust and credibility.

Can a business be both socially responsible and highly profitable?

Yes, social responsibility improves business image, builds customer loyalty, ensures worker cooperation, and creates sustainable long-term profitability.

Important Board Questions

Define social responsibility of business and explain how it differs from legal responsibility with one example each. [2 marks]

Define social responsibility as obligation beyond law for voluntary actions serving society. Give one example of legal responsibility (tax payment) and one of social responsibility (pollution control beyond legal requirement).

Explain any two arguments in favour of business assuming social responsibility. How does social responsibility contribute to long-term profitability? [5 marks]

Select two arguments: (1) justifies business existence by serving human needs, (2) long-term profit through improved image and worker cooperation. Explain that firms lose worker, customer, and government support when irresponsible, hence social responsibility ensures sustainable growth and profitability.

ABC Electronics Limited is a large company manufacturing smartphones. Recently, it was found that the company: (i) employed workers in poor conditions with low wages, (ii) supplied defective products to customers without disclosure, (iii) dumped toxic waste in a nearby river, and (iv) evaded taxes through fraudulent accounting. Analyse this case in terms of social responsibility towards different stakeholders and explain the long-term consequences for the company. [6 marks]

Identify stakeholders violated: employees (poor wages/conditions), customers (defective products/deception), community (environmental pollution), government (tax evasion). Explain consequences: loss of employee cooperation and productivity, customer trust erosion, community opposition, legal penalties, damaged reputation, and unsustainable long-term growth. Connect to argument that social responsibility ensures durable business success.

Assertion-Reason Questions for Social Responsibility of Business and Business Ethics

Q1. Assertion (A):

Social responsibility is broader than legal responsibility of business.

Reason (R):

Social responsibility includes an element of voluntary action for societal benefit beyond mere legal compliance.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both the assertion and reason are true, and the reason correctly explains why social responsibility is broader. Legal compliance alone is insufficient; social responsibility demands voluntary actions addressing societal needs.

Q2. Assertion (A):

Business enterprises should assume social responsibilities towards all sections of society affected by their decisions.

Reason (R):

Assuming social responsibilities helps business earn maximum profits in the short term regardless of stakeholder impact.

Answer: C — A is true but R is false — The assertion is correct according to the chapter, but the reason is false. The chapter states firms gain maximum profits in the long run (not short term) through social responsibility, and this success depends on stakeholder cooperation, not ignoring stakeholder impact.

Q3. Assertion (A):

Socially desirable practices such as providing good quality goods and creating healthy working conditions improve the image of enterprises.

Reason (R):

Improved company image through social responsibility leads to better cooperation from stakeholders and increased long-term profitability.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both the assertion and reason are true, and the reason correctly explains the mechanism by which social responsibility improves enterprise performance. Stakeholder cooperation directly supports long-term business success.

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Case-Based Questions (CBQ) for Social Responsibility of Business and Business Ethics

Case Study:

Rajesh Industries, a leading textile manufacturing company in India, recently made significant changes to its business practices. The company switched from using child labor (which was technically illegal but widely practiced in the region) to employing adult workers at higher wages. Additionally, they installed advanced pollution control equipment costing Rs. 50 lakh annually, exceeding government requirements. They published transparent information about working conditions and environmental impact on their website. These decisions increased operational costs by 15%, but the company reported improved employee retention (dropped from 30% to 8% annual turnover), increased customer loyalty, and attracted socially conscious investors. Their stock price increased by 22% over two years despite higher costs.

Q1. Which aspect of social responsibility is PRIMARILY demonstrated by Rajesh Industries' decision to employ adult workers instead of child labor?

  • A. Responsibility towards government compliance only
  • B. Responsibility towards employees and social values beyond legal minimum requirements ✓
  • C. Responsibility towards maximizing shareholder profit
  • D. Responsibility towards reducing operational efficiency

Answer: B

Q2. The installation of pollution control equipment exceeding government requirements demonstrates:

  • A. Wasteful spending that harms business profitability
  • B. Voluntary social responsibility towards environmental protection and community ✓
  • C. Mandatory compliance with environmental laws
  • D. That the government has inadequate pollution standards

Answer: B

Q3. Which of the following best explains why Rajesh Industries achieved stock price appreciation despite 15% increase in costs?

  • A. Higher costs automatically lead to higher stock prices
  • B. Lower child labor costs offset higher wages
  • C. Improved stakeholder trust, employee retention, and customer loyalty from social responsibility created long-term value ✓
  • D. The government subsidized socially responsible companies

Answer: C

Q4. Rajesh Industries' transparent disclosure of working conditions and environmental impact aligns with which CSR principle mentioned in the chapter?

  • A. Responsibility towards shareholders only
  • B. Complying only with mandatory legal requirements
  • C. Minimizing information disclosure to protect business secrets
  • D. Recognition of social obligations and accountability to multiple stakeholders ✓

Answer: D

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