The Social Responsibility of Business is to Increase its Profits by Milton Friedman
The New York Times Magazine, September 13, 1970. Copyright 1970 by The New York Times Company.
When I hear businessmen speak eloquently about the "social responsibilities of business in a free-enterprise system," I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free enterprise when they declaim that business is not concerned "merely" with profit but also with promoting desirable "social" ends; that business has a "social conscience" and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of re¬formers. In fact they are-or would be if they or anyone else took them seriously-preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting pup¬pets of the intellectual forces that have been undermining the basis of a free society these past decades.
The discussions of the "social responsibilities of business" are notable for their analytical looseness and lack of rigor. What does it mean to say that "business" has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom.
Presumably, the individuals who are to be responsible are businessmen, which means individual proprietors or corporate executives. Most of the discussion of social responsibility is directed at corporations, so in what follows I shall mostly neglect the individual proprietors and speak of corporate executives.
In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con¬forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom....
...What does it mean to say that the corporate executive has a "social responsibility" in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment....
In each of these cases, the corporate executive would be spending someone else's money for a general social interest. Insofar as his actions in accord with his "social responsibility" reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers' money. Insofar as his actions lower the wages of some employees, he is spending their money.
The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so. The executive is exercising a distinct "social responsibility," rather than serving as an agent of the stockholders or the customers or the employees, only if he spends the money in a different way than they would have spent it. But if he does this, he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.
This process raises political questions on two levels: principle and consequences. On the level of political principle, the imposition of taxes and the expenditure of tax proceeds are governmental functions. We have established elaborate constitutional, parliamentary and judicial provisions to control these functions, to assure that taxes are imposed so far as possible in accordance with the preferences and desires of the public-after all, "taxation without representation" was one of the battle cries of the American Revolution.
Here the businessman-self-selected or appointed directly or indirectly by stockholders-is to be simultaneously legislator, executive and, jurist. He is to decide whom to tax by how much and for what purpose, and he is to spend the proceeds-all this guided only by general exhortations from on high to restrain inflation, improve the environment, fight poverty and so on and on....
...On the grounds of consequences, can the corporate executive in fact discharge his alleged "social responsibilities?" On the other hand, suppose he could get away with spending the stockholders' or customers' or employees' money. How is he to know how to spend it? [...] He is presumably an expert in running his company-in producing a product or selling it or financing it. But nothing about his selection makes him an expert on [social issues. ... Besides], how much cost is he justified in imposing on his stockholders, customers and employees for this social purpose? What is his appropriate share and what is the appropriate share of others?...
...Many a reader who has followed the argument this far may be tempted to remonstrate that it is all well and good to speak of Government's having the responsibility to impose taxes and determine expenditures for such "social" purposes as controlling pollution or training the hard-core unemployed, but that the problems are too urgent to wait on the slow course of political processes, that the exercise of social responsibility by businessmen is a quicker and surer way to solve pressing current problems.
Aside from the question of fact-I share Adam Smith's skepticism about the benefits that can be expected from "those who affected to trade for the public good"-this argument must be rejected on grounds of principle. What it amounts to is an assertion that those who favor the taxes and expenditures in question have failed to persuade a majority of their fellow citizens to be of like mind and that they are seeking to attain by undemocratic procedures what they cannot attain by democratic procedures. In a free society, it is hard for "evil" people to do "evil," especially since one man's good is another's evil....
...Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions.
To illustrate, it may well be in the long run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects. Or it may be that, given the laws about the deductibility of corporate charitable contributions, the stockholders can contribute more to charities they favor by having the corporation make the gift than by doing it themselves, since they can in that way contribute an amount that would otherwise have been paid as corporate taxes.
In each of these-and many similar-cases, there is a strong temptation to rationalize these actions as an exercise of "social responsibility." In the present climate of opinion, with its wide spread aversion to "capitalism," "profits," the "soulless corporation" and so on, this is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest....
...The political principle that underlies the market mechanism is unanimity. In an ideal free market resting on private property, no individual can coerce any other, all cooperation is voluntary, all parties to such cooperation benefit or they need not participate. [...] The political principle that underlies the political mechanism is conformity. The individual must serve a more general social interest-whether that be determined by a church or a dictator or a majority. [...]
Unfortunately, unanimity is not always feasible. There are some respects in which conformity appears unavoidable, so I do not see how one can avoid the use of the political mechanism altogether.
But the doctrine of "social responsibility" taken seriously would extend the scope of the political mechanism to every human activity. [...] That is why, in my book Capitalism and Freedom, I have called it a "fundamentally subversive doctrine" in a free society, and have said that in such a society, "there is one and only one social responsibility of business-to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."
Putting Customers Ahead of Investors by John Mackey
First published in Reason magazine. October 2005, Print Edition.
In 1970 Milton Friedman wrote that "there is one and only one social responsibility of business--to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." That's the orthodox view among free market economists: that the only social responsibility a law-abiding business has is to maximize profits for the shareholders.
I strongly disagree. I'm a businessman and a free market libertarian, but I believe that the enlightened corporation should try to create value for all of its constituencies. From an investor's perspective, the purpose of the business is to maximize profits. But that's not the purpose for other stakeholders--for customers, employees, suppliers, and the community. Each of those groups will define the purpose of the business in terms of its own needs and desires, and each perspective is valid and legitimate.
My argument should not be mistaken for a hostility to profit. I believe I know something about creating shareholder value. When I co-founded Whole Foods Market 27 years ago, we began with $45,000 in capital; we only had $250,000 in sales our first year. During the last 12 months we had sales of more than $4.6 billion, net profits of more than $160 million, and a market capitalization over $8 billion.
But we have not achieved our tremendous increase in shareholder value by making shareholder value the primary purpose of our business. In my marriage, my wife's happiness is an end in itself, not merely a means to my own happiness; love leads me to put my wife's happiness first, but in doing so I also make myself happier. Similarly, the most successful businesses put the customer first, ahead of the investors. In the profit-centered business, customer happiness is merely a means to an end: maximizing profits. In the customer-centered business, customer happiness is an end in itself, and will be pursued with greater interest, passion, and empathy than the profit-centered business is capable of....
...While Friedman believes that taking care of customers, employees, and business philanthropy are means to the end of increasing investor profits, I take the exact opposite view: Making high profits is the means to the end of fulfilling Whole Foods' core business mission. We want to improve the health and well-being of everyone on the planet through higher-quality foods and better nutrition, and we can't fulfill this mission unless we are highly profitable. High profits are necessary to fuel our growth across the United States and the world. Just as people cannot live without eating, so a business cannot live without profits. But most people don't live to eat, and neither must a businesses live just to make profits....
...Many thinking people will readily accept my arguments that caring about customers and employees is good business. But they might draw the line at believing a company has any responsibility to its community and environment. To donate time and capital to philanthropy, they will argue, is to steal from the investors. After all, the corporation's assets legally belong to the investors, don't they? Management has a fiduciary responsibility to maximize shareholder value; therefore, any activities that don't maximize shareholder value are violations of this duty. If you feel altruism towards other people, you should exercise that altruism with your own money, not with the assets of a corporation that doesn't belong to you.
This position sounds reasonable. A company's assets do belong to the investors, and its management does have a duty to manage those assets responsibly. In my view, the argument is not wrong so much as it is too narrow....
...The shareholders of a public company own their stock voluntarily. If they don't agree with the philosophy of the business, they can always sell their investment, just as the customers and employees can exit their relationships with the company if they don't like the terms of trade. If that is unacceptable to them, they always have the legal right to submit a resolution at our annual shareholders meeting to change the company's philanthropic philosophy. A number of our company policies have been changed over the years through successful shareholder resolutions.
Another objection to the Whole Foods philosophy is where to draw the line. [...] The fact that Whole Foods has responsibilities to our community doesn't mean that we don't have any responsibilities to our investors. It's a question of finding the appropriate balance and trying to create value for all of our stakeholders. [...] Corporate philanthropy is a good thing, but it requires the legitimacy of investor approval. In my experience, most investors understand that it can be beneficial to both the corporation and to the larger society....
...The business model that Whole Foods has embraced could represent a new form of capitalism, one that more consciously works for the common good instead of depending solely on the "invisible hand" to generate positive results for society....
...Both capitalism and corporations are misunderstood, mistrusted, and disliked around the world because of statements like Friedman's on social responsibility. His comment is used by the enemies of capitalism to argue that capitalism is greedy, selfish, and uncaring. If we are truly interested in spreading capitalism throughout the world (I certainly am), we need to do a better job marketing it. I believe if economists and business people consistently communicated and acted on my message that "the enlightened corporation should try to create value for all of its constituencies," we would see most of the resistance to capitalism disappear....
...To extend our love and care beyond our narrow self-interest is antithetical to neither our human nature nor our financial success. Rather, it leads to the further fulfillment of both. Why do we not encourage this in our theories of business and economics? Why do we restrict our theories to such a pessimistic and crabby view of human nature? What are we afraid of?...
...The truth is that there is no way to calculate whether money invested in business or money invested in helping to solve social problems will create more value. Businesses exist within real communities and have real effects, both good and bad, on those communities. Like individuals living in communities, businesses make valuable social contributions by providing goods and services and employment. But just as individuals can feel a responsibility to provide some philanthropic support for the communities in which they live, so too can a business. The responsibility of business toward the community is not infinite, but neither is it zero. Each enlightened business must find the proper balance between all of its constituencies: customers, employees, investors, suppliers, and communities.
Behind the mask: The real face of CSR Christian Aid, published January 21 2004
All day a steady file of people make their way up and down the potholed main road running through Umuechem, going to and from a polluted stream that is now their only source of water. Large trucks thunder by at regular intervals, on their way to and from the oil pumping station on the outskirts of town. For, despite the lack of basic amenities, this is the oil-rich Niger Delta of southern Nigeria.
As well as taps that are dry, this town of 10,000 people also has a hospital that has never treated a patient, a secondary school where no lessons have ever been taught, a post office that has never handled a letter and a women's centre that has never held a meeting. All were supposed to have been supplied under 'community development' schemes, funded from oil money - local wells produce 15,000 barrels a day. But all have failed or remain unfinished.
Four of these projects were 'generous' gifts from the Shell Petroleum Development Company of Nigeria - the oil giant's subsidiary that runs the flow station near Umuechem and is the country's dominant oil company. The others, including the water system, came from the state-financed Nigeria Delta Development Corporation, which works alongside Shell - to similar effect.
Sadly, this story of failure is not new. In 1990, when the country was under military rule, local young people mounted a protest about the lack of such facilities. Shell called in the police, most of the town was burned to the ground and 80 people were killed. To this day, no one has received a penny in compensation and the basic amenities are still missing.
This is the story of corporate social responsibility - or CSR - writ large.
Certainly, it is a story that stands in stark contrast to Shell's professed commitment to 'core values of honesty, integrity and respect for people'.
Outside certain areas of business and investment and supporters in the public sector, few people will know much about what CSR is, where it comes from and how it works. If they have ever heard of it, they will probably just think that it sounds like a good thing (which it does, that is part of the point). But this is now a big, and growing, industry, seen as a vital tool in promoting and improving the public image of some of the world's largest corporations.
In simple terms, companies make loud, public commitments to principles of ethical behaviour and undertake 'good works' in the communities in which they operate. It sounds and looks like a modern version of selfless philanthropy and no doubt in many individual cases is motivated by a genuine wish to help and has led to some benefits. What's different is that companies frequently use such initiatives to defend operations or ways of working which come in for public criticism....
CSR, in other words, can merely become a branch of PR. Sometimes this looks like the only reason for spurts of development activity by large companies. Shell, for instance, was at the forefront of CSR in Britain, following the joint public relations disasters of the Nigerian government's execution of human rights activist Ken Saro-Wiwa and the row over Shell's plan to dump the Brent Spar North Sea oil platform - both in 1995. Certainly for some, such as those living in Umuechem, Shell's CSR programme has brought no tangible benefits.
Christian Aid, of course, supports responsible and ethical action by business. The problem with CSR, we say, is that it is unable to deliver on its grand promises. The case studies in this report highlight that the corporate world's commitments to responsible behaviour are not borne out by the experience of many who are supposed to benefit from them. In some cases, the rhetoric and the reality are simply contradictory.
- Shell in Nigeria claims that it has turned over a new leaf there and strives to be a 'good neighbour'. Yet it still fails to quickly clean up oil spills that ruin villages and runs 'community development' projects that are frequently ineffective and which sometimes even widen the divide in communities living around the oilfields.
- British American Tobacco stresses the importance of upholding high standards of health and safety among those working for them and claims to provide local farmers with the necessary training and protective clothing. But contract farmers in Kenya and Brazil claim this does not happen and report chronic ill-heath related to tobacco cultivation.
- Coca-Cola emphasises 'using natural resources responsibly'. Yet a wholly owned subsidiary in India is accused of depleting village wells in an area where water is notoriously scarce and has been told by an Indian court to stop drawing ground water.
Christian Aid is saying that CSR is a wholly inadequate response to the sometimes devastating impact that multinational companies can have in an ever more globalised world - and that CSR is actually used to mask that impact. Those who suffer the most as a result are the poor and vulnerable people in developing countries and the environments in which they live.
Business, moreover, has consistently used CSR to block attempts to establish the mandatory international regulation of companies' activities. Their basic argument is that CSR shows how committed corporations already are to behaving responsibly and that introducing such regulation could destroy this good will. Business leaders are also constantly saying that regulation is bad for their profits - the two statements are, of course, not unconnected.
Modern CSR can be seen to have been born during the 1992 Earth Summit in Rio de Janeiro, when UN-sponsored recommendations on regulation were rejected in favour of a manifesto for voluntary self-regulation put forward by a coalition of companies called the World Business Council for Sustainable Development. Its version of events was endorsed by the US, the UK and other western governments. The British government, for example, is still a vocal supporter of voluntarism.
Such resistance to regulation, this report argues, has left the worst corporate abusers effectively unrestrained, and the victims of their actions without adequate means of redress. Whatever responsible initiatives companies choose to carry out on their own behalf, binding international standards of corporate behaviour must be established to guarantee that the rights of people and the environment in developing countries are properly protected....
This is not pie-in-the-sky wishful thinking. There is already a model of how such regulation could work in moves currently being made to curb bribery. Since 1997, some 35 rich countries of the Organisation for Economic Cooperation and Development (OECD) have signed up to a convention that outlaws the bribery of foreign public officials by business people. This is the first modern example of internationally agreed, legally binding regulation for non-financial reasons.
Britain, after a bit of OECD prodding, has now fulfilled its obligation by enacting new anti-bribery laws. More than 100 UN member states appear likely to take this one stage further and have already signed a UN convention on bribery. These activities have led to a far greater interest among business in tackling bribery.
Christian Aid is now calling for a similar framework of international regulation, backed up by legislation at a national level, to ensure the enforcement of real social responsibility in the corporate world. Introducing the threat of prosecution and legal action, with resulting detailed disclosure of company documents, would create a powerful incentive for companies to behave responsibly.
At a national level, we want the UK government to:
- adopt new laws to make corporate social and environmental reporting and disclosure mandatory for British companies - including the disclosure of payments to overseas governments, information on the social and environmental impact of overseas operations and information on legal actions against companies
- frame new responsibilities for company directors to give them a 'duty of care' for communities and the environment, making them legally accountable for the actions of their companies overseas
- change the law to enable people harmed by British companies' overseas operations to seek redress in UK courts and to provide the resources to enable them to do so.
Christian Aid, then, wants to give companies' ethical commitments 'teeth' by underpinning them with binding regulation. We are advocating a move beyond corporate social responsibility to corporate social accountability - meaning that companies in future will have a legal obligation to uphold international standards.
Then and only then, we believe, will the corporate world as a whole be able to live up to its professed commitment to high standards and sustainable development in its dealings with some of the world's poorest people.
The entire report can be found at: http://www.christian-aid.org.uk/indepth/0401csr/
Metaline Falls is a town of 235 people near Teck Cominco's Pend Oreille Mine development, in northeastern Washington State. Unemployment in the region is high and the region has gone through a number of boom-bust cycles (a former mine; forestry; and a cement factory that closed). Teck Cominco realized that its mine would be short-lived, on the order of 10 to 12 years, and therefore the impact on the community near the mine would be significant-an influx of people for a short period of time, leading to the typical boom-bust economic environment. Teck Cominco asked itself the question What does the community want?, believing that answering this question would help the company figure out what it could be doing today to ensure a sustained positive impact on the community. Teck Cominco decided to approach the community early in the development process and initiate a dialogue to determine ways that the company could support the development goals and objectives of the community.
In 1998, Teck Cominco and the City Council of Metaline Falls formed a committee of 10 to 15 people with broad representation from the community and the company to act as liaison and to develop an economic development plan for the community. The plan that emerged from this process outlined community economic development goals and objectives and identified ways in which the company and the development of the mine could help in achieving those goals and objectives. For example, the company is looking at ways in which mine infrastructure can be used to support economic activities once operation ceases. To support the community's desire to hire locally, the company has initiated a project with the state-level department of employment to develop a local job bank for the community to facilitate local hire by Cominco's contractors. The company is also working with the local environmental community to address their concerns and has agreed to do its best to reduce metal loads below those required by the permits.
The trust and good will generated between the company and the community has reduced the level of confrontation of the mine development to "just about zero". This is significant as, under US law, while permits may be granted, they can also be challenged in court. Such challenges can lead to significant delays and costs for project proponents to the point where they can affect the economic viability of projects. As well, the lack of conflict associated with plans to open the mine and the willingness of the company to explore new ways of doing business has encouraged a relationship of collaboration between the company and regulators, which can help with permitting processes.
According to Teck Cominco, while effective stakeholder engagement processes have a clear benefit to companies in terms of dealing with regulatory processes, progressive approaches to stakeholder engagement are not just about expediting the process. Effective engagement helps build relationships that support the resolution of other issues that inevitably arise over time. The process has helped reframe the entire debate from "bad mining" and jobs versus the environment to a debate on how "the mine could contribute to the social health of the community".