Social Responsibility in Business

Many people have asked themselves what is the connection between the business world and the social world. The issue of the case presented here is to analyze the performance of the Ben & Jerry’s Homemade Inc. in order to have a clearer view of the broader picture; can a business have as its primary goals the ever increasing of its profit and, at the same time, be responsible to social communities?! Is that a nonsense, a possibility or it can be even a reality?

During this essay I will try to answer these questions by taking the Ben & Jerry’s Homemade Inc. case as reference. By analyzing its performance we will try to reach conclusions about this new category of businesses. We will see what the financial facts are for this company and how the future can be for it. Can a business like the one in case grow both in financial and social stature? But first, let me give you a short picture of the relation between the social world and the business world. It is interesting to see how has their interrelation grown the last century?

The social and business worlds

The industrial revolution changed the way how economic performance is measured. The business world was transformed deeply by it. New and genuine ways of producing were introduced. But it also had a tremendous impact on the social world. The old paradigms were broken and new ones were born.

During the last century this gave rise to the phenomenon of immigration, both internal and international. The driving force behind this migration is the search for better life conditions and quality. Massive numbers of people have moved mostly from third-world areas of the world to the more industrialized part of the planet. Internally the population movement was from rural toward urban areas. The twentieth century was the time of big urban areas.

For the first time in history we have the coming of the “megacities” and “metropolises”. These are very densely populated urban areas. Of course the population who came to these cities moved from rural areas around these cities or immigrants from other countries. The “Population Council” (an NGO specialized in population related issues researches around the world) estimates that, especially in the developing areas of the planet:

“Among relatively poor urban children, the disadvantages of urban living (crowding and possibly greater exposure to communicable disease) can offset the advantages of better urban service provision and generally higher incomes.” (“Urban poverty and health”, par. 2).

Most of the immigrants in the United States (almost half of them) reside in big cities like Los Angeles, New York, Miami or Chicago. The large amounts of people in this areas put enormous pressure in the social and natural environment surrounding them and in the economic income distribution. This is because immigrants and illegal aliens put pressure on the market by influencing the rise of education and health care costs.

Another effect is the influencing of the pay-per-hour amount in the job market (of course by decreasing it) and so competing with citizens. But by doing so immigrants themselves have low income earnings and thus having difficulties in fulfilling their needs. They do not have the same consuming power as the rest of the people living in the United States. So immigrants are more endangered by poverty as a category than the other part of our society. In the United States the Census Bureau (part of the U.S. Department of Commerce) in the 2008 release of “Income, Poverty, and Health Insurance Coverage in the United States: 2007” report acknowledges that:

“In 2007, the family poverty rate and the number of families in poverty were 9.8 percent and 7.6 million.” (“U.S. Census Bureau Press Release”, par. 6)

And from these people that were in poverty, the rate of non-US citizens, which means basically immigrants, in poverty is:

“Among the foreign-born population, the poverty rate and the number in poverty increased to 16.5 percent and 6.2 million, respectively, in 2007, from 15.2 percent and 5.7 million, respectively, in 2006. An increase in poverty for U.S. noncitizens (from 19.0 percent in 2006 to 21.3 percent in 2007) accounted for the rise in poverty for the foreign-born population overall.” U.S. Census Bureau Press Release”, par. 12)

Ben & Jerry’s Homemade Inc

From the short facts given above it is obvious that the industrial revolution, capitalism in general, and the wealth it produces do not create opportunity for everyone equally. We recognize that the gap between the rich and the poor is wider than at anytime since the 1920’s. “Ben & Jerry’s Homemade Ice Creams” is one of the rarest companies within the United States with a clear vision on both economic and social performance.

Their goal is to strive to create economic opportunities for those who have been denied them and to advance new models of economic justice that are sustainable and replicable. Also, it is one of the few businesses that in their “Mission Statement” make the commitment to respect all human beings, independently from their race, origin, religion, etc. and for the communities they live in (par. 10). That is the part concerning their social responsibility awareness.

But they are a business company. In their description of the company we find a statement that the economic mission is, “to operate the Company on a sustainable financial basis of profitable growth, increasing value for our stakeholders & expanding opportunities for development and career growth for our employees.” (par. 2). And that makes this firm special. It has proclaimed a difficult mission in maintaining the balance between its identity as a business and the responsibility toward human communities. Can you do that and still be a successful business? To do business means you have to make marketing in order to attract people toward your product (or service, if you are in the service business), and your aim is that they consume as much as it is possible of your products. But tin a social responsible company, like Ben & Jerry’s, you have to take account of their social commitments in their marketing and financial strategies. Often these two things contrast each other.

Ben & Jerry’s marketing and financial strategies remain consistent with the Company’s three-part mission. Building on Ben & Jerry’s significant brand name recognition, the Company continues to emphasize the high quality, natural ingredients in its products while highlighting its commitment to social change through innovative promotional and advertising campaigns.

In our case they were trying to find the “balance” between maximizing profit and accountability before communities by trying “To make, distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome, natural ingredients and promoting business practices that respect the Earth and the Environment” (“Our Mission Statement”, par. 1).

The financial answer was to be competitive in the market with a high quality product. The social responsibility was shown in trying to achieve this financial point by not using any means to damage the environment. They used certain strategic techniques in putting effort to facilitate brand awareness. They focused their marketing efforts on communicating the Company’s unique business approaches via Public Relations campaigns designed to generate unpaid newspaper, magazine, radio and TV news coverage. Company founders Ben Cohen and Jerry Greenfield continuously took personal appearances on TV and radio informing the public of their commitments. And this strategy began to give its effects.

Let us now see some financial facts of this company. For Ben & Jerry’s Homemade Inc. share history started in May 1984, in Vermont. Shares were divided in three equity classes. Class A-Common, the holders of which were entitled by one vote for each share they held. Class B-Common, the holders of which were entitled to 10 votes per share they held. These shares were reserved primarily for insiders. Class A-Preferred was a stock held exclusively by a community action group; the Ben & Jerry’s Foundation. This class A-Preferred stock entitled the foundation to special voting rights in business issues.

They had even the right to limit the voting rights of other forms of “A & B-Common” stock in certain transactions such as mergers or tender offer, even if the common stock holders were in favor of these transactions. This was the social responsibility part of “control” over the finances of the Company. Financing decisions were subject to community focus not only share-holders focus. Public offering began in May 1984 with Vermont only offerings with 75.000 shares issued at a price of $10.50 per share (“Public Capitalization and Stock Split History”). The first offerings were made to Vermonters in belief that the support that they had given to the establishment of the company will also be the strength for the economic progress of the company. After that, to provide greater liquidity and capital there was another broader offering.

The company’s class A-Common stock was traded on the NASDAQ National Market System under the symbol BJICA. And this financial strategy resulted successful. Stock prices went up and the net profit also. The following table contains selected financial information for the Company’s fiscal years 1990 through 1994.

Summary of Operations

Summary of Operations

As we can see from the table above it is clear that the net sales and gross profit boosted and the economic part of the company was going well. Profit for shareholders was good. But the company had a social aim also. It was a major donator to public events and community celebrations in the Vermont area. In 1994 the Company created a Community Action Team at each of the Company’s five sites in Vermont. Each Community Action Team receives a portion of the 7.5% of profits directed for philanthropy to makes cash contributions to various environmental and community organizations in the Vermont area (“Public Capitalization and Stock Split History”, par. 4).

But at a certain point financial managers understood that the company cannot go strong in both the objectives it had. The rising demand for their products made them to increase production. But this led to an increase in waste also. And since the company had a very strong social responsibility mission they would have to find ways to get rid of the waste but without damaging the environment. In doing this they had to invest in ways that were financially more expensive.

The effect was that this increased their costs. And so the response of the company was to raise prices of the products it was offering. Soon this flip-flop gave its effects. Company’s stock prices began to go down and its net profit also. In their 1999 (“Management’s Discussion and Analysis of Financial Conditions and results of Operations”, par. 34) report the company acknowledged that the “Net income after reflecting the special charge was $3.4 million in 1999. Net income as a percentage of net sales was 3.8% (excluding the non-recurring special charge) and 1.4% (after reflecting the special charge) in 1999 as compared to 2.2% in 1998 and 3.0% in 1997” (par. 34).

This gave a domino effect. The demand for their products also began to go down. In order to keep up with the competition they had to find new ways of doing business. At the same report we find that diluted net income per share excluding the non-recurring special charge was $1.21 compared to $0.5 in 1990. The problem was that in 1990 to1993 it went up from $0.5 to $1.07 and from that time until 1999 from $1.07 to $1.21. We can see that in the 4 years of the beginning of the decade profit was increased $0.71 and for the consecutive 6 years only $0.14. on one hand it was needed to operate fast financial decisions and this meant that sometimes the social responsibility was to be left apart.

The social factor acted as a set back because time was needed to evaluate the financial decisions and sometimes time was not available. You had to act fast to have effective financial managerial decisions. So the company was going into recession. For shareholders it was not worth that much anymore hold their shares. There were various takeover offers and eventually in August, 2000 the company was acquired by Unilever Inc (“Press Release”, par. 1). Can you run a business that is equally dedicated to make increasing profit and responsible to the communities? With this takeover the dream of having businesses that are at the same level responsible toward the communities and their shareholders, was shaken.

Social responsibility in today’s business world

As a financial manager I would argue that for companies today there are several outcomes from what is written above. First, the above case study showed that having a company both dedicated equally to social responsibility and profit increase is very, very difficult in the nowadays business world. Eventually Ben & Jerry’s case demonstrated that the social commitments of the company were functioning as a “hold back” factor for profit increase in, at least, two directions.

First, they influenced the timing of financial decision by prolonging the times of decision taking. Second and I think more important, social commitments of the company were one of the major factors of production cost increase. This increase in cost was due to the damage-free environmental disposing techniques of their waste and the part of the profit that was regularly donated to the Ben & Jerry’s Foundation. Either the company has to cut its support for the “green technology” and charity donations or cut its profits. Either business has to show more responsibility toward shareholders or communities.

Regarding the Gulf region I would argue that financial institutions and business in general will be affected. The principal business in the Gulf area is related to oil production. Either by drilling for it, transporting it, or any other service related to oil. Other major forms of business, especially Islamic banks and financial institutions, are related to the property and real estate markets. In a more socially responsible business world, where firms have to find ways to put less stress on the environment, oil related businesses will be impacted severely. This is because to put less stress on the environment means to find alternative fuel efficiencies.

These will decrease the production of oil. The profits of the businesses related to oil will virtually go toward a full stop. The other businesses related mainly to the property market are destined to change behavior. These firms are obliged to invest in new technologies in order to build cleaner, safer and in a focus more in community needs rather than profit gaining (“Gulf Arab Islamic banks eye slowing real estate”, par. 7).

So, in this respect in the gulf area we will have a strong impact on business if the more socially responsible view is going to be applied. Especially for businesses that relate to oil production or other related services. But I do think that the impact on business will be global and the financial world will have to change behavior into a more responsible one toward communities and the environment.

This is because there are important global trend that are going to impact seriously the business world in the near future. First, no company can permit itself to ignore ideas like global warming. It is not an issue if it is true or not that greenhouse gas emission that manufacturing business produce is the main cause of global warming. For a smart company the issue is that the public, the customer, the consumer, is “bombarded” with information regarding this issue by the media, civil society groups and movements, political leaders, etc. This means that they are going to take this factor in consideration when they make their purchases as customers.

This means that the public’s focus on social responsibility by business is higher. People now want from businesses to take more responsibility concerning communities and make efforts not to damage the environment. And the other factor is that we have large international agreements, like the Kyoto Protocol, that oblige countries to enforce restrictive measures toward the business part of their society. The distribution and redistribution of wealth among society, on a focus on immigrants, is also becoming an important issue. The last Presidential campaign in the United States is a demonstration of the importance of this issue to the public.

No manager can ignore these factors if he wants his company to be successful. Not to listen to the desires and preferences of the public would be definitely bad marketing but it could also be disastrous financial economics. I think that the business world has listened to the vox populi. Businesses are already investing in “green technology” that reduces the damaging effects over the environment. If business continues to take shareholders interest before community interest this will impact its economic performance. The engine of business growth is the desires and mentality of the people. If they begin to dislike you, your business is not going to do well. There is no long-term solution for the business world other than a higher degree of social responsibility.

References

Marshall, Gordon. (1998). A Dictionary of Sociology. Oxford, Oxford University Press.

(2001). Harris Interactive Survey Indicates Fragility of Corporate Reputations. The Wall Street Journal, no. 43.

(2008). Population Clocks. U.S. Census Bureau. Web.

(2008). State of world’s population. UNFPA. Web.

(2008). Urban poverty and health. The Population Council. Web.

(2008). U.S. Census Bureau Press Release. U.S. Census Bureau. Web.

Moulton, Wilbur. Thomas, Howard. Pruett, Mark. (1996). Business failure pathways: environmental stress and organizational response. Journal of Management. Web.

(1997). Business failure pathways: environmental stress and organizational response. UNFCC. Web.

(2008). Our Mission Statement. Ben & Jerry’s Homemade Inc. Web.

(2000). Public Capitalization and Stock Split History. Ben & Jerry’s Homemade Inc. Web.

(1994). Public Capitalization and Stock Split History. Ben & Jerry’s Homemade Inc. Web.

(2000). Management’s Discussion and Analysis of Financial Conditions and results of Operations. Ben & Jerry’s Homemade Inc. Web.

(2006). Economic Costs of Emission Reductions. The Global Warming Earth Summit Fact Sheet. Web.

Frederik Richter. (2008). Gulf Arab Islamic banks eye slowing real estate. El-Economista. Web.

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