Reference no: EM131520548

Question: Router plc, a mining company, has said in its mission statement that it will ‘endeavour to make the maximum possible profit for its shareholders while recognising its wider responsibilities to society'. Router plc has an opportunity to mine for gold in a remote and sparsely populated area. The mining process proposed, in this instance, means that all vegetation will be removed from the land concerned; after mining has finished, there will remain substantial lagoons full of poisonous water for at least 100 years. The mining process is a profitable one, given the current world price of gold. However, if the company were to reinstate the mined land, the process would be extremely unprofitable. The company has received permission from the government to carry out the mining. The few local residents are opposed to the mining.

Sol: This question tackles the problem of a mission statement with particular reference to the social responsibility of a firm if there is a conflict between profitability and pollution. In part (a), note that the mission statement uses the term ‘profit', a short-term measure, rather than ‘shareholder wealth', the presumed economic objective of businesses. This allows you to contrast the conflict of social responsibility with profit in the short run, while using the sustainable enterprise to indicate that in the long run the interests of shareholders and society may not be in conflict.

(a) The mission statement that Router plc has published states that the firm aims to make the ‘maximum possible profit'. It is quite common for objectives of this kind to be included in mission statements. In addition, the ‘wider responsibilities to society' are recognised. This company objective is difficult to measure and there will be instances where the maximisation of profit on behalf of the shareholders conflicts with ‘wider responsibilities to society'. The gold-mining project provides an example of such a conflict. It is expected to provide a profitable opportunity, but will result in ‘substantial lagoons full of poisonous water for at least 100 years'. In the short run this reveals a significant conflict between the interests of the shareholders and the public, particularly those living in the vicinity of the proposed mine. While it is often possible to reduce adverse environmental effects, these remedies will involve the business in costs that will reduce the profit available for distribution to the shareholders. However, theories of the sustainable enterprise suggest that in the long run the following of socially responsible policies may safeguard shareholder wealth. Router requires that the authorities grant it operating licences and that shareholders continue to hold its shares. If it develops a reputation as a ‘dirty firm', both may change their minds. This would cause a fall in both profits and share price. This would of course be a fall in shareholder wealth.

(b) There are various ways that social responsibility may be incorporated into the firm's decisions:

1. Include costs of environmental restoration in project appraisals. It is essential that the economic costs of a project are incorporated into the project evaluation. It is usual for a firm to include all relevant financial costs in a project evaluation, but it is also important that the effect of the investment should be considered. In this example, Router must include the cost of reinstatement in its calculations. This will result in the rejection of the project, as it does not meet the profitability criterion.

2. Include social responsibility in the firm's mission and objectives. It is necessary that policy decisions of this type are widely publicised within the firm to ensure that all managers are aware that the environmental factors must be incorporated into all decisions. Router has a commitment in its mission statement and there should be a written undertaking given by each manager that social issues will be taken into account.

3. Employ outside consultants to advise on, or audit, decisions. The appointment of a person either from within the firm or an outside consultant to monitor the position could be a useful method of implementing the environmental policy. It is possible that managers could neglect the ‘wider responsibilities', especially if they are under pressure to boost the results of the company. In this situation, there may be a temptation to understate the costs by omitting the cost of coping with the ‘wider responsibilities to society'. A procedure, therefore, should be introduced to ensure that the environmental effects are properly considered and this should include the regular use of outside ‘experts' or impartial non-executive directors to assess the environmental effects before decisions are taken within the company.

4. Develop a social consultation panel. Router could convene a panel of stakeholder representatives to act as a consultative committee to discuss its decisions. In this case the inclusion of local people and environmentalists on such a panel would point up the issues mentioned in the case.

(c) It is usual for an organisation to have a number of objectives. It is common to find that the objectives conflict and a profit-maximisation objective will always be compromised by any other objective which reduces the revenue received or increases the cost of an organisation. Furthermore such conflicts may arise from the fact that organisations are led by a group of managers and therefore the conflicting personal agendas of each must be considered. Methods of dealing with this include:

1. Establish a hierarchy of objectives. By prioritising objectives and scoring alternative projects against them, it becomes possible for management to choose the option with the highest weighted score. This one will best meet its overall objectives.

2. Satisficing. Where the conflict of objectives means that no single objective can be maximised, management may decide to adopt the course of action that is most acceptable to all by giving each stakeholder group something of what it wants. In this case perhaps to dig the mine but also provide some small amount of environmental restitution so that some of the damage is averted.

3. Sequential attention. This involves giving each stakeholder group's interests consideration over time, though not necessarily for every project. The effect is to keep them on board. In this case perhaps the mine will abandoned because the consequences are so great, but the next project, with lesser environmental damage, will be adopted. The environmentalists on the management team will feel that they have achieved something.

4. Side payments. These are compensatory payments to buy acquiescence. In this case perhaps quality housing might be provided for the labour force which would remain after the works had finished. This could be pointed to as some compensation for the environmental damage and population displacement.

(d) In an article in the August 1992 edition of CIMA Student, the author identified common features and issues of ethical questions: different perceived long- and short-term advantages and disadvantages; advantages to one group compared with disadvantages for another.