Answer to Question #293636 in Economics of Enterprise for emu

Question

Is it reasonable to expect firms to take actions that are in the public interest but are detrimental to stockholders? Is regulation always necessary and appropriate to induce firms to act in the public interest? Substantiate with real world examples

Answer 1

Corporate Social Responsibility

It is irrational for firms to take actions in the interest of the public, whereas compromising stockholders’ interests. For regulation however, it is appropriate and necessary they induce firms to work in the interest of the public. Taking the example of dumping and pollution, firms acting in the interest of share holders may get corrupt and disregard the public interest to properly dispose, as it may seem expensive to them. In this case, the necessity of regulations to compel firms in acting on the interest of the public, is necessary.

Reference.

Abeysekera, A. P., & Fernando, C. S. (2020). Corporate social responsibility versus corporate shareholder responsibility: A family firm perspective. Journal of Corporate Finance, 61, 101370. https://doi.org/10.1016/j.jcorpfin.2018.05.003