Merck and Corporate Social Responsibility
Businesses are not disconnected from the society that they are in. This means that they are also affected by the processes, problems, and issues that are prevalent in the society. As such, corporations could not help but be involved in the society one way or another. Given the different social concerns and needs that abound in the society where corporations operate, they are called upon to exercise social responsibility in any way possible. In fact, even governments encourage the private and corporate sector to engage in social responsibility.
What is Corporate Social Responsibility
Before a corporation can effective engage with the society, there should be at least a working definition of corporate social responsibility. For one, this concept is far different from the effective management of the public relations of the corporation. Corporate social responsibility means that the corporation recognizes the role of the broader society and the people in the community in their business models. As such, engaging in social responsibility means that the corporation is giving a non-financial benefit to an important stakeholder to the people of the society (Moir 23).
Although corporations are looking for means to maintain their profits and their level of customer service. Yet, with corporate social responsibility, the organizations shall have to spend money in setting up foundations and sponsoring various activities that deal with the improvement of the welfare of the people residing in the community. Ironically, social responsibility also communicates to the people in the society that the company is not only interested in profits but in uplifting and empowering the overall well-being of the people that they are serving. With corporate social responsibility, consumers actually come to view the corporation in a much better light than before. In the long run, the enhanced relationship of the company with the society leads to higher profitability (Mohr, Webb & Harris 52).
Merck and Corporate Social Responsibility
In 1978, Dr. William Campbell worked on the discovery of a compound that can work against parasites that are related to river blindness. This kind of illness is inflicted by larvae. In most developing countries, people afflicted by river blindness go blind and in some instances, they die. Around fifteen million people were afflicted by these disease and the drugs available then had serious side effects and were generally unsafe.
The drug, which was called Mectizen, was finally completed in 1987. The problem is, even before it was completed, Roy Vagelos, who served as the director of Merck’s research laboratories and eventually as CEO, knew that there would be problems in marketing and selling the drug. Furthermore, international funding would be difficult to come by (Green 42).
In spite of the millions of dollars of cost in developing Mectizen, the CEO and Merck decided to give away the drug for free for as long as the company is producing the drug. During the time that the decision was made, Merck had $5.1 billion assets. A decade after this big social responsibility decision, Merck saved millions of people afflicted by the river blindness disease but it lost more than $200 million in profits (Green 46).
Responsibility to Stockholders versus Responsibility to the Society
One of the major choices that corporations face is the tradeoff between their responsibilities to their stockholders versus to the society. This pertains to the financial performance of the firm and the cost of doing activities related to corporate social responsibility (McGuire, Sundgren & Schneeweis 865).
In the case of Merck, the tradeoff was very clear. In the course of ten years, they lost $200 million dollars. From the standpoint of corporate financial performance, this is a huge amount, which could also make a difference in the books and financial performance of the company. This might be interpreted as an abandonment of Merck’s fiduciary responsibility to its stockholders and shareholders.
When a company pours millions of dollars in the development of any type of product, it would naturally look for effective return on investment. Without which, there would be no incentive in pursuing such a project. After all, corporations are always on the lookout for profits and for the financial performance of the products and services that it offers.
Although the decision of Merck to make the drug available for free is altruistic and humanitarian, it sets a dangerous precedent in a free market that regulates and balances supply and demand. If such a move were the norm instead of the exception, smaller firms in the market would declare bankruptcy and be out of business. Furthermore, such a move also becomes beneficial to bigger companies who can afford to give out their products and services. The incentive for the development, improvement, and innovation of the drug will be curtailed severely.
Issues and Concerns concerning the Action of Merck
On the part of those receiving the free drug, the value of such drug would be close to nothing to them since they have not paid for anything for it. In countries that have no effective distribution process, this drug may also be used for profit by people wanting make profit out of the free drug.
Merck could have opted to distribute the drug for a subsidized amount. This would still be in the interest of corporate social responsibility. Although the length of time for the return on investment would be longer, it would still have been beneficial for the company in the long run. In the period of 2003-2007, Merck still remains as a thriving and successful pharmaceutical company in the world (Merck website, n.p.). The move of Merck to distribute the drug for free did not negatively affect its financial performance.
Companies that engage in corporate social responsibility have to tread a fine line. They have to balance the interest of profitability and financial performance. Although corporate social responsibility tends to be costly, there are both financial and non-financial rewards to the company. For one, it enhances the image of the corporation in the society. Consumers will also hear about the positive achievements of the company and will help them win new customers over. In the long run, contributing to altruistic and humanitarian causes enhances the operations of the organization.
Green, Ronald. Responsibility and the Virtual Corporation. In John Houck and Oliver Williams (eds). Is the Corporation Dead?. Rowan and Littlefield, 1996, 37-48.
Merck Website. Accessed 14 May 2008 from http://www.merck.com/finance/reportsannual.html.
Moir, Lance. What do we mean by corporate social responsibility?. Corporate Governance, Vol. 1, No. 2, pages 16-22, 2001.
Mohr, Lois A., Deborah J. Webb, Katherine E. Harris. Do Consumers Expect Companies to be Socially Responsible? The Impact of Corporate Social Responsibility on Buying Behavior. Journal of Consumer Affairs, Vol. 35, No. 1, pages 45–72, June 2001.