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Milton Friedman and the Social Responsibility of Business
Joel Makower, 19 Nov 06

The most provocative statement of the past half-century on the role of business in society came in an essay in the New York Times, written by a fellow named Friedman.

Of course, I'm talking about Milt, not Tom.

In a 1970 Times magazine article, the economist Milton Friedman argued that businesses' sole purpose is to generate profit for shareholders. Moreover, he maintained, companies that did adopt "responsible" attitudes would be faced with more binding constraints than companies that did not, rendering them less competitive.

The occasion of Friedman's passing last week offers an opportunity to revisit that argument. It remains the basis for many companies' contention today that "corporate social responsibility," "sustainable business," and other such monikers are a distraction from their core obligation: to act in their shareholders' best interests. That is, acting "responsibly" risks reducing profits or forgoing revenue in the name of social good.

"What does it mean to say that the corporate executive has a 'social responsibility' in his capacity as businessman?" asked Friedman in his 1970 article.

"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. Or that, at the expense of corporate profits, he is to hire 'hardcore' unemployed instead of better-qualified available workmen to contribute to the social objective of reducing poverty.
"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." Friedman argued that such actions in effect turned executives into public employees or civil servants, levying "taxes" (in the form of corporate money allocated to social causes) and making "expenditures" -- a part of "the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses."

Friedman concluded:

"The difficulty of exercising 'social responsibility' illustrates, of course, the great virtue of private competitive enterprise -- it forces people to be responsible for their own actions and makes it difficult for them to 'exploit' other people for either selfish or unselfish purposes. They can do good -- but only at their own expense."

We know better now. For example, we understand that ignoring environmental and social issues can be bad for business. Companies that pollute their local communities risk poisoning their customers. Ignoring the state of the local school system risks depleting the pool of qualified workers. Abusing workers risks higher turnover and training costs, not to mention greater difficulty attracting the most qualified candidates.

It's never that simple, of course. In a globalized world, companies are free to exploit or pollute a local community, then move on to the next place. Unfettered markets and exploitation-friendly tax schemes reward companies for acting in their own interests in the name of economic growth and competitiveness. So, Friedman's philosophy still reigns supreme.

Friedman's philosophy is far from universally shared, even in the business community. In 1979, for example, Quaker Oats president Kenneth Mason, writing in Business Week, declared Friedman's profits-are-everything philosophy "a dreary and demeaning view of the role of business and business leaders in our society." Wrote Mason: "Making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life. Getting enough to eat is a requirement of life; life's purpose, one would hope, is somewhat broader and more challenging. Likewise with business and profit."

Mason went on:

"The moral imperative all of us share in this world is that of getting the best return we can on whatever assets we are privileged to employ. What American business leaders too often forget is that this means all the assets employed -- not just the financial assets but also the brains employed, the labor employed, the materials employed, and the land, air, and water employed."

He urged readers to "encourage, not evade, discussion of those problems that arise when the activities of business conflict with the needs and concerns of society."

But these were largely just well-intentioned words. Action, and even discussion, on some of these issues would be decades in coming. Even when it did take place, the discussion involved only big companies. The social responsibility of smaller firms is just now entering the conversation.

There are signs that companies are somewhat more enlightened today when it comes to understanding their social responsibility. A survey published this month by The Conference Board found that while big companies see more potential reward than risk when it comes to corporate citizenship and sustainability (CC&S) issues, they are clearly struggling to find concrete ways to capitalize on their programs in the marketplace.

Reward Trumps Risk: How Business Perspectives on Corporate Citizenship and Sustainability Are Changing, by David J. Vidal, queried 198 companies, the majority of them with more than 10,000 employees and worldwide sales of more than $5 billion. Among the key findings:

  • Two-thirds say corporate citizenship and sustainability issues are of growing importance for their businesses.

  • Despite this growth, a significant majority (59 percent) don't have an active strategy for developing new business opportunities that arise from meeting corporate citizenship and sustainability (CC&S) needs.

  • A solid majority (62 percent) have formal programs to manage their CC&S practice. Another 35 percent without formal programs conduct regular reviews of these activities.

  • Most companies—71 percent—report publicly on citizenship and sustainability performance.

  • Boards of directors are routinely engaged in CC&S activities at almost half of responding companies. Only 11 percent say there is no board review on these issues.

    It's progress, to be sure, but painfully slow, given the scope and urgency of some of our planet's social and environmental ills.

    So the debate continues unabated: What, exactly, is businesses' responsibility? To make profits? To "do well by doing good"? A simple, universally accepted answer is unlikely. The good news is that in the nearly four decades since Milton Friedman elevated the question, the conversation has become robust. And there is clear support for the idea that companies can operate in a way that strengthens their various stakeholders and still provide solid, sustainable returns for their shareholders.

    Indeed: There's a growing case to be made that they can, they should, and eventually must.

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    Comments

    Fascinating and much appreciated entry. In particular considering some of the revisionist make up over his figure or simple praise we have seen over the last few days. This is a much needed debate and addressing the Friedman in this context is fundamental.
    Best regards,
    Daniel


    Posted by: Daniel Lobo on 19 Nov 06

    Is the Quaker Oats president Kenneth Masob or Kenneth Mason? You use the name with an 'n' twice, and with a 'b' once. Doing a quick web search it seems to be "Mason", but I figured I'd ask. :)


    Posted by: David Magda on 19 Nov 06

    It's Kenneth Mason. I've fixed the typo. Thanks for pointing it out.

    -- JM


    Posted by: Joel Makower on 19 Nov 06

    The things Friedman posited just look ridiculous in the present day. The unfortunate thing is that a large number of people still think the way he did.


    Posted by: Joseph Willemssen on 19 Nov 06

    Here is Friedman's original article for anyone would like to read the whole thing.


    Posted by: Fat Knowledge on 19 Nov 06

    Milton Friedman, John Mackey (Whole Foods), and T.J. Rogers (Cypress Semiconductors) had an article debate on this topic in Reason this time last year. The article is http://www.reason.com/news/show/32239.html .

    I think his response should be read and considered.


    Posted by: Rudy Fink on 19 Nov 06

    From my understanding of free market capitalism, efficiency is improved by the elimination of externalities. In other words, things work well when the party in control of something is the same party who directly suffers if it is controlled badly. Ignorance is when you are in control, and you do suffer the consequences of your actions, but you don't know it.

    Another free market concept is transaction cost. A free market system works well when resistance to the flow of information and goods is minimized. Ebay is a great example, where one person has an obscure item for sale that someone at the other end of the world wants. They will both benefit by an exchange. Ebay mitigates the transaction costs by bringing these people into contact and providing them with a means of exchange. This way, the person who owns the obscure item will get the best price for it, and the item will end up in the hands of the person who values it most. (Coase's Theorem).

    Friedman's statement was made in a time of ignorance. It appears that he considered corporate good citizenship as a wasteful frivolity because the bottom line was narrowly defined on a paper ledger sheet. Given the rapid flow of information today, and the reduction of transaction costs, the corporate bottom line now integrates factors that were once externalities. In other words, as I understand it, corporate citizenship is actually a great improvement in efficiency because corporate leadership is beginning to understand that the corporation does suffer directly from things within their control. Corporate leadership is learning that both its shareholders and its customers live downstream.


    Posted by: Mike Tierney on 20 Nov 06

    While I think Friedman's thesis has a certain utilitarian merit in determining small scale models,
    I also think that it has been interpreted in far too 'dry' a manner, and certainly with the assumption that 'social responsibility' and 'shareholders best interests' are mutually incompatible.

    Sure, a company's sole duty may be to generate profit for its shareholders. But, what is profit? Especially, when we are only just beginning to realise that the environment is such a large part of the economy.

    Actually, Goldratt put it better in 'The Goal':

    'The goal of a company is to be productive'

    He then went on to define productivity as being equal to Throughput (goods sold) - Inventory (cost of goods in production) - Overhead (cost of converting inventory to throughput). Taken to extremes, this can still be one very cold equation (eg staff would be classified as 'overhead'), but it also hints at other interpretations (eg waste and pollution is 'inventory' that never gets sold!). Of course, anyone who thinks those variables are independent are kidding themselves!


    Posted by: Tony Fisk on 20 Nov 06

    Friedman was a brilliant macro-economist. His Nobel Prize-winning work (which as I recall was done very early in his career) has served the world well. We are all genuinely better off because of his scholarship.

    His public advocacy, especially in matters related to corporate finance, the economics of the firm, and the role of government, always seemed to fall short of the mark he set for himself in his "real" work. He seemed to fail to separate his personal values from his profession, just as decried in his Nobel lecture.

    The much-cited Times Magazine article is one such piece. As previous posts have pointed out, it turns on his assumption that social responsibility is either "rhetorical" or "not in the interest of his employers" meaning owners/share holders. The rest simply follows from this assumption.

    What intrigues me is that this is the precise structure of argument that one could use to show the value of CSR. It takes the same form as Modigliani and Miller's revolutionary paper on capital structure and some of Gene Fama's work on efficient markets. Although Friedman's article is all argument and no evidence, if one did have evidence one could test the validity of the assumptions, just as Modigliani, Miller and Fama have.

    I believe that Friedman's assumption is bunk. I also know that some things claimed to be CSR are mostly rhetoric-just look at the number of "sustainability" programs that are run out of PR, communications, community relations and corporate philanthropy departments.

    I agree with Joel, a universal answer is not likely. But that does not mean that we shouldn't continue to work for one!


    Posted by: j david on 20 Nov 06

    Excellent piece, Joel. It brings Friedman's commentary into the real world of business today.

    One point that I'd like to add is to challenge the assumption that the only thing that stock buyer is interested in is profit. For myself and an increasing amount of others, as "consumers" of stock (just like as consumers of anything else), we care about the overall objectives and methods that underly and add value to our purchase. There are reasons that many of us have chosen to invest in Apple rather than IBM and Google rather than Micrsoft that are about the underlying values and persona of the corporations, not just about profit. I would posit that corporate responsibilities fall under the same category. John Mackey has made similar statements about why he believes people should and shouldn't buy Whole Food stock.



    Posted by: Jerry Stifelman on 20 Nov 06

    It seems Friedman didn't suffer from utter consistency. Consider this quote, which leads off an article -- The blurred lines of being responsible -- in Ausralia’s The Age:

    "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. 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 donations, the stockholders can contribute more to charities they favour 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." So who said this? Who's defending corporate responsibility? Some enlightened business leader? Some agitator from a non-government organisation? Tim Costello?

    Actually, it was Milton Friedman in that seminal piece, "The social responsibility of business is to increase its profits", written for the New York Times magazine in September 1970....

    In his book Capitalism and Freedom, Friedman called it a "fundamentally subversive doctrine"....

    But strip away the rhetoric from Friedman, and there are moments where the lines start to blur. As he pointed out in the New York Times piece, it might make business sense for a corporation to work closely with a community. But please, don't call it corporate social responsibility, which he said was frequently a "cloak for actions that are justified on other grounds rather than a reason for those actions".

    The point of the story - and where I find myself in surprising agreement with Friedman(!) - is this: what if CSR initiatives were integral to business initiatives, as opposed to a side bar or palliative? What if the purpose of business wasn’t to maximize profit, but was - as in the view of Bank of America founder AP Gianinni - was to do what the business was created to do.

    No one imagines that the purpose of a business is to pay the utility company for electricity. Why then think that the purpose is to pay shareholders for capital? Seeing profit as a cost of doing business, rather than its purpose, unlocks the chains of the more doctrinaire Friedmanesque line, and opens the possibility of designing and managing businesses where profit and purpose (and social responsibility) are integral -- which strikes me as a far more powerful approach to both business and social responsibility.


    Posted by: Gil Friend on 22 Nov 06

    See also the comment by Richard Posner on the Becker-Posner Blog,
    http://www.becker-posner-blog.com/archives/2006/11/milton_friedman.html


    Posted by: Lars Smith on 24 Nov 06

    Another giant of American business from the 1960s and 1970s passed away this summer: Bill Norris, the founder of Control Data Corporation. The material below appeared this month in "Boschee on Marketing," a monthly column I write for the Social Enterprise Reporter (www.sereporter.com). It strikes a very different chord than Friedman.


    Remembering Bill Norris:
    A social enterprise pioneer
    -- 30 years ahead of his time

    By Jerr Boschee

    He was a maverick . . . and when he began hectoring his fellow CEOs about the marriage of social needs and business opportunities, most of them snorted and turned away.

    I worked and traveled with Bill Norris for five years, from December 1979 through December 1984.

    Founded in 1957, Control Data Corporation became the most successful computer company of the 1960s and 1970s, the darling of Wall Street. By 1984 the company was worth $5 billion and employed 60,000 people. According to an article in The Washington Post two years later, Norris “not only marched to a different drum, he created the company that built the drum -- and pounded out the beat for nearly three decades . . . . (he was) one of the most successful, inventive and iconoclastic business leaders? in the country.

    But the race riots of 1967 shocked Norris to the core. Cities were burning, mobs rioting and looting. Los Angeles, Chicago, Detroit, Philadelphia. Even Minneapolis, Control Data’s home!

    Norris sent one of his senior executives into the midst of the riots to figure out what the company could do to turn things around. His aide returned a few days later. “These people need jobs,? he said. “They need real jobs.?

    Norris responded instantly. He took it as a personal challenge. “Build ‘em a plant,? he said. “Build a Control Data plant right there in the heart of the city.?

    Business leaders scoffed. Control Data employees cringed. But the personal awakening Bill Norris experienced changed his life -- and the course of business history. Within the next ten years the company opened plants in four inner cities (Minneapolis, San Antonio, Washington, D.C., and St. Paul) -- and in two of the most god-forsaken rural communities in the country.

    By the time I arrived at corporate headquarters as his chief communications lieutenant in 1979, Norris had gone even further by fashioning a business philosophy that left no room for argument: “Our mission,? he wrote, “is to address the major unmet needs of society as profitable business opportunities.?

    It was the first articulation of social enterprise as we know it today.

    It was heresy to Wall Street, but the media loved it. So did Peter Drucker, the centerpiece of an international conference we sponsored in 1982 that attracted more than 250 CEOs. Jesse Jackson wrote to Norris, “I had given up on corporate America until I visited your operations and met you.? Ralph Nader praised him in The Big Boys, his 1986 best-seller about corporate CEOs.

    And invitations for Norris to tell others about Control Data’s new strategy flooded into his 14th floor office from all over the world. During the five years I traveled with him he delivered more than 300 speeches -- to government leaders, corporate titans, international financiers. He gave interviews to more than 100 major newspapers, magazines and television programs. I worked 90-hour weeks just to keep pace, but he never slowed. He lugged around a briefcase crammed with notes and vitamins. Every day he rode the elevator seven floors, then climbed the stairs seven more to his office. He was indefatigable.

    And Control Data’s social enterprises mushroomed.

    By the early 1980s, Control Data was operating mobile medical vans on a Native American reservation in South Dakota, using computer technology to herd caribou beyond the Arctic Circle, revitalizing entire urban neighborhoods and rural communities, working with Chief Justice Warren Burger to create training and employment opportunities for prisoners, launching the first small business incubators in the country, developing the nation’s first wind farms, creating a vast array of computer-based learning programs for colleges and universities and self-paced learners. The innovations just kept coming, and publicity flowed like a river.

    But few remember -- because Control Data failed as a company. It began to falter in the mid-1980s. Competition from Japan for computer peripherals and assaults from below by mini- and micro-computers made Control Data mainframes an endangered species. Wall Street and media critics blamed Norris for being distracted, too focused on his “social programs,? and leftists harped at the way Control Data carried them out.

    They were all right. Norris took his eye off the company’s core, and the people running the social enterprises made a lot of mistakes.

    And yet they were all wrong.

    Bill Norris was simply 30 years ahead of his time. He was a trailblazer. Mistakes are part of the game, and others learned from Control Data’s miscues. Social enterprise today is a major strategy for nonprofits, small businesses, government policy-makers and -- yes -- major corporations. By the time Norris died in August 2006 after a long battle with Parkinson’s disease, almost everything he’d attempted to do was being done successfully by others -- although few recalled or even knew about the ground he’d broken.

    I remember.

    Working for Bill Norris changed my life, and I’ve spent the past quarter-century spreading the gospel of social enterprise. Hundreds of others came out of Control Data imbued with the Norris philosophy, and we’ve been spreading the seeds all over the world. Whenever I see another corporation starting a business to address a social need, I think of Bill Norris. Whenever I speak to a group of fledgling social entrepreneurs and see the excitement in their eyes, I think of Bill Norris. And every time I read about another corporate CEO preaching the importance of a double or triple bottom line, I remember Bill Norris thundering from his bully pulpit.


    Posted by: Jerr Boschee on 29 Nov 06



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