Ownership constituents and turnover as modifiers of business social responsibility.

The renaissance of the nineteen-sixties in the West (and especially in the United States) rediscovered the East and also influenced a redefinition of America's value system. The enlightenment that consequently expanded to all social institutions struck at the modus operandi of the basic American

economic system. Society started to doubt seriously whether the "good" of a society is achieved via the sole objective of the maximization of material wealth. A new thinking evolved into a belief that the real good of a society, instead, will come by wisely focusing on such criteria beyond immediacy in evaluating socially "good" deeds from "bad." It gave birth to a new phenomenon that socially correct actions were only those that directly and evenly helped society as a whole -- not any one institution or segment of it. This new concept came to be known as quality of life and contribution towards its enhancement the criterion by which the performance of all societal institutions was to be appraised. Over the next two decades, it became more and more evident that this was to be the litmus test for all actions -- political, economic, and technological.

The philosophies and regulations that guided American business operation also came under the scrutiny of this newly emerged norm. It asked how could business practices that accepted and encouraged actions in a marketplace wholly driven by profit- maximization be good for the society when they caused, allowed or effectively resulted in imprudent exploitation of the environment; imposed on consumers products that lacked function and quality; pushed products upon the market without regard to health and safety; and practiced monopolistic control on supply in an attempt to extract the highest price ignoring need. Then, the system inequitably distributed the rewards among corporate constituents, and tolerated unethical or questionable actions from its peer group (see, for example, The Jungle, and in modern times, Bhopal or Exxon Valdez).

The two-century-old capitalist dogma, nearly commanding the stature of a religious scripture in this regard, became exposed and vulnerable. American society gathered the courage to question the validity of the model of behavior preaching a business ethic which stated that by pursuing one's own interest one frequently promotes that of the society more effectually than when one really intends to promote it (Smith, |1776~ 1937, pp 421-423). Americans rejected a total dependence on the more pro-business philosophy (Laissez-faire) that permitted practices, resulting in none-to-very-little social regulation of business, since it embraced the concept that "good" for business would come if it were given an essentially free hand in making its decisions and regulating itself and in a belief that what was good for business was good for society.

Like other American social institutions, the new goal set for business required a contribution towards the enhancement of quality of life for all. Each and every action of business was to be judged in light of the progress towards attainment of that goal. Governments at every level and public interest groups began monitoring actions against the norms set by this goal and whenever a lack in such a spirit was detected, legal regulation was enforced. The barrage of legislation passed during the decades of the sixties, seventies and eighties at Federal, state and local levels is to a large extent indicative of the society's commitment to the concept of quality of life.

Yet, business advocates were slow to realize American resolve in this respect. To them, all actions of business that led to the maximization of their owners' wealth were business contribution in the area of social responsibility. Friedman (1970) openly preached this "sermon" and discouraged acts based on "public policy." According to him, a corporation existed for the well-being of its stockholders, and its primary responsibility was to engage in actions that resulted in maximization of profits. Because of the influence Friedman and the "Chicago School" commanded on business thinkers (and on the public sector in the 1970s and 1980s), the issue of social responsibility was confused. It assumed the yardstick for all actions was net income, earnings per share, and stock price.

OWNER INTERESTS AND SOCIAL RESPONSIBILITY

After over two decades of the so-called Friedman Doctrine, an analysis indicates a flaw in the premise that guided this doctrine. Ownership of American business of the nineteen-nineties is not the same as that of a few decades ago. Present day corporate ownership makes an even stronger case for the acceptance of broad corporate social responsibility. Since the opponents of business social responsibility based on public policy considerations believed that the only "right" action is the one that is for the good of the owners, society attempted to get to know the owners of American business corporations and then see what is good for those "owners."

In contrast to the feudal business ownership of the past, today more and more corporations are substantially owned by the society at large. Large sums of "public" money, in the form of mutual funds, bank deposits, and retirement accounts, are present in fulfilling the capital needs of business. The largest number of Americans ever in history own corporate stock, thus reinforcing the belief that corporate business is really owned by American society at large. Obviously, now looking at the true ownership picture, one can say that what is good for society, is good for business.

Today it is certainly true that stockholders are only one of the several stakeholders of a business corporation. There is no doubt that every stakeholder seeks to achieve some goal, which is mostly personal. And, as soon as it appears to a stakeholder that either its goal has been achieved, or appears that it will be impossible for a goal to be achieved, it has the option to quit this voluntary association. Some will quit sooner, some later. The sooner a stakeholder leaves this association, the more one's actions will be guided by self interest and will not be guided by loyalty or devotion towards the organization. This will cause turbulence in the organization and will bring doubt and uncertainty. Since business does not like uncertainty and would like to avoid it, it would be interesting to see how much of this uncertainty is caused by the lack of loyalty on the part of corporate owners. To measure this such a behavior was studied as exhibited by the top ten Fortune companies of 1992 (Fortune, 1993) in the form of their "Ownership Turnover" rate. To understand the dynamics in operation here, the rate of change in owner's behavior over the decade of nineteen-eighties was also studied.

CHANGE OF OWNERSHIP

The loyalty of owners to their company is indicated by how soon ownership changes hands. In the past, owners frequently kept their companies in their families. Ownership of closely held entities was maintained even when the companies did not perform well. How owners exercised their loyalty to their company can be measured by the ownership turnover rate. For a publicly held company such a rate will be determined by the annual common stock turnover rate (CST), computed by the following ratio:

CST = (Number of shares of common stock traded during the year)/(Average number of common shares outstanding that year)

For the year 1981, the CST for the Fortune top ten companies (General Motors, Exxon, Ford Motor, International Business Machines, General Electric, Mobil, Philip Morris, E.I. Du Pont De Nemours, Chevron, TABULAR DATA OMITTED and Texaco) were computed from their stock trade data (Standard and Poor's, 1992 and 1993). The CSTs ranged between the high of 0.3552 for Texaco and a low of 0.1730 for Exxon, implying Texaco had the most fickle owners and Exxon the most loyal. The average ownership turnover rate for the group was at 0.25008. Alternatively, it took 5.78 years to change ownership at Exxon, whereas, it only took 2.81 years for ownership to change hands at Texaco. On the average, ownership changed hands about every four years at these companies. To understand the dynamics of owner corporate loyalty behavior, these rates were studied for the year 1992. The Common Stock Turnover Rate for 1992 ranged from the high of 0.8953 for IBM to a low of 0.2097 for Exxon. The 1992 average ownership turnover rate came to 0.5169, which translates to the fact that ownership in these top ten companies changed hands at the rate of once every 1.93 years, which amounts to almost a one-half decrease in owner loyalty to their companies.

Should there still be a continuation and perpetuation of the myth that the corporation existed only for owners and that there should be no corporate social responsibility? Thus theory, as many developed in the 1980s, needs to be reevaluated in light of solid business reversal.

REFERENCES

Friedman, Milton. (1970). The social responsibility of business is to increase its profits. New York Times Magazine. September 13.

Smith, Adam. |1776~1937. An inquiry into the nature and causes of the wealth of nations. New York: Random House.

The Fortune 500: Largest U. S. industrial corporations. (1993). Fortune, vol. 127, April 19. p. 184.

Standard and Poor's Corporation. (1993). Security Owner's Stock Guide, January.

Standard and Poor's Compustat Services, Inc. (1992). Compustat PC Plus, November.