Theories of Business Sustainability

Question 1

Definition of Corporate Social Responsibility

Answer 1

The responsibility an entity has to all stakeholders, including society in general and the physical environment in which it operates

Question 2

Possible reasons as to why entities act in a socially responsible way

Answer 2

• By acting in the best interest of society generally, an entity might be able to seek higher prices or sell a greater volume of product and therefore achieve the goal of maximising
OR
• Entities want to limit interference from governments or other groups; and therefore of the minimum needed to retain control over the industry
OR
• Entities are motivated by the desire to do the right thing, and that there is no economic motive behind acting in a socially responsible manner

Question 3

What are the 5 theories?

Answer 3

1. Shareholder Primacy (shareholder value)
2. Agency Theory
3. Stakeholder Theory
4. Stewardship Theory
5. Legitimacy Theory

Question 4

Shareholder Primacy (shareholder value)

Answer 4

• Shareholder (owner) returns are the primary focus of an organisation
  
  • Central part of business sustainability is to ensure the maximisation of shareholder value (maximise shareholder wealth)

Question 5

Agency Theory

Answer 5

• Theory which describes the relationship where one party (the principle) employees another half (the agent) to perform some activity on their behalf
○ Describes the relationship between the owners (shareholders) and managers of an entity - the shareholders appoint managers as their agents to run the business on their behalf

Question 6

Stakeholder Theory

Answer 6

• Holds that the purpose of the entity is to work for the good of all stakeholder groups, not just to maximise shareholder wealth
• Employees, governments, customers and communities all have an interest in the affairs of the entity
○ These investors are owed an accounting because they too invest by committing valuable resources, including not only money but their work, careers and sometimes their lives

Question 7

Stewardship Theory

Answer 7

• Directors act in the interest of a group of stakeholders and not shareholders value
  
  • Suggests that the motive for serving on a board goes beyond a perspective of pure self-interest - this motivate may be guided by a code of company purpose or directors see themselves as stewards of a particular interest

Question 8

Legitimacy Theory

Answer 8

• Suggests that entities must conduct operations in accordance with societal expectations
  
  • Explicit and implicit expectations that society has about how the organisation should conduct its operations
• An organisation must be responsive to these expectations as they change over time