Q.‘Business is essentially a social institution and not merely a profit making activity’. Explain.

Business is permitted by society to function and earn profits, so it owes something back and must not do anything society finds undesirable. Profit is the outcome of service to people, not the sole purpose. Because business is a product of, and influenced by, society, it must serve the interests of shareholders, workers, consumers and the community, obey the law and protect the environment. Business is therefore an organ of society — a socio-economic institution — that must reconcile profit with society's demands.

Society permits business — so business owes society

• Society allows a business to carry on industrial or commercial activity and to earn profits. In return, the enterprise is obliged not to do anything society considers undesirable — no adulteration, misleading advertising, tax evasion, pollution or exploitation of workers.
• Durable, lasting success comes through socially responsible and ethically upright behaviour, not through practices that profit the firm while damaging society.

Profit is the outcome of service, not the sole aim

• Business exists to provide goods and services that satisfy human needs; profit should be seen as the outcome of service to people. Prosperity and growth are possible only through continuous service to society, which justifies the very existence and growth of business.

Business is responsible to many interest groups

• Once the social objective is accepted, business owes specific responsibilities to shareholders/owners, workers, consumers, and the government and community — fair returns, meaningful work and fair wages, quality goods at fair prices, obeying laws, paying taxes and protecting the environment. A firm exists in a web of social relationships, not in isolation.

Business is judged by social standards

• New social standards accept business as legitimate only on the condition that it serves social needs. Since it is society that permits business to exist and grow, no business can be done in isolation from society, and business is ultimately judged by social standards.
• A privately owned firm must meet the challenge of a democratic society where people have human rights and can demand responsible conduct. Unless business changes its outlook and plays its role as an organ of society, it has little chance of success.

Business has become a socio-economic activity

• Social and economic forces have made business a socio-economic activity. While it is essentially an economic enterprise that must justify itself on economic performance, it is also an organ of society and must justify its continuance by fulfilling its roles and responsibilities to society. Social interest and business interest are complementary, not contradictory.