13.4 Should Corporations Have Social Responsibilities? The Arguments Against
- Define and elaborate the major arguments in favor of the corporate purpose as limited to increasing profits.
- Define and elaborate major arguments against corporations accepting broad social and environmental responsibilities.
The Only Corporate Responsibility Is to Increase Profits
In 1970, just as the idea of corporate social responsibility was gaining traction and influential advocates in the United States, the economist Milton Friedman published a short essay titled “The Social Responsibility of Business is to Increase its Profits.” Possibly the most provocative single contribution to the history of business ethics, Friedman set out to show that large, publicly owned corporations ought to be about making money, and the ethical obligations imposed by advocates of CSR should be dismissed. His arguments convinced some and not others, but the eloquent and accessible way he made them, combined with the fact that his ideas were published in a mainstream publication—the New York Times Magazine—ensured their impact.
Businesses, as discussed at the chapter’s beginning, come in all shapes and sizes. When the topic is social responsibility, however, attention frequently fixes on very large corporations because they’re so big (and therefore able to do the most good) and powerful (the philosophies driving them tend to set the tone for business life in general). Friedman’s essay concerns these large, publicly held corporations. Here are his arguments.
The Argument That Businesses Can’t Have Social Responsibilities
A business can’t have moral responsibilities any more than a wrench can. Only humans have moral responsibilities because only we have consciousness and intentions: we’re the only things in the world that can control our actions, that can distinguish between what we want to do and what’s right to do. Therefore, only we can have responsibilities in the ethical sense. What, then, is a business? Nothing more than a tool, something we make to further our ends. It may work well or poorly, but no matter what, it doesn’t do what it wishes, so we can’t blame or credit the business, only those individuals who use it for one purpose or another.
In Woburn, Massachusetts, according to this argument, it makes no sense to say that W. R. Grace has some kind of corporate responsibility to keep the environment clean. A company doesn’t have any responsibilities. It’s like a wrench, a thing out in the world that people use, and that’s all. Would you accuse a wrench of being irresponsible if someone uses it to loosen the bolts on some truckers’ tires and so causes an accident and disastrous spill of toxins? You’d probably accuse the person who used the wrench of acting irresponsibly, but blaming the wrench for something would be madness.
The Argument That Corporate Executives Are Responsible Only to Shareholders
Corporate executives are employees of the owners of the enterprise. They’re contracted and obligated to conduct the business as the owners desire, not in accord with the wishes of some other people out in the world advocating broad social concerns. Executives in this sense are no different from McDonald’s burger flippers: they’re hired and agree to do a certain thing a certain way. If they don’t like it, they’re free to quit, but what they can’t do is take the job and then flip the hamburgers into the trash because their friends are all texting them about how unhealthy McDonald’s food is.
What do corporate owners desire? According to Friedman, the typical answer is the highest return possible on their investment. When you buy shares of the industrial chemical maker W. R. Grace, you check once in a while what the stock price is because price (and the hope that it’s going up) is the reason you bought in the first place. It follows, therefore, that executives—who in the end work for you, the owner—are duty bound to help you get that higher share price, and the quickest route to the goal is large profits.
What about the executive who decides to dedicate time and a corporation’s resources to social welfare projects (to things like reducing runoff pollution even further than the law requires or hiring released felons as a way of easing their passage back into society)? Friedman is particularly cutting on this point. It’s despicable selfishness. There’s nothing easier than generosity with other people’s money. And that’s what, Friedman hints, CSR is really about. It’s about corporate executives who like the idea of receiving accolades for their generous contributions to society, and they like it even more because the cash doesn’t come out of their paycheck; it’s subtracted from shareholder returns. There’s the seed of an argument here, finally, that not only is corporate social responsibility not recommendable, it’s reproachable: in ethical terms, corporate leaders are duty bound to refuse to participate in social responsibility initiatives.
The Argument That Society Won’t Be Served by Corporate Social Responsibility
One serious practical problem with the vision of corporate executives resolving social problems is it’s hard to be sure that their solutions will do good. Presumably, corporate executives got to be executives by managing businesses profitably. That’s certainly a difficult skill, but the fact that it has been mastered doesn’t automatically imply other talents. More, given the fact that corporate executives frequently have no special training in social and environmental issues, it’s perfectly reasonable to worry that they’ll do as much harm as good.
One example of the reversed result comes from Newsweek. Executives at the magazine probably thought they were serving the public interest when they dedicated space in their April 28, 1975, issue to the threatening and impending environmental disaster posed by global…cooling. Not a very enticing subject, they probably could’ve done more for their circulation numbers by running a story (with lots of pictures) about the coming summer’s bathing suit styles, but they did the science to stoke broad discussion of our environmental well-being. As for the stoking, they certainly succeeded. Today, many scientists believe that global warming is the real threat and requires corporations to join governments in reducing carbon emissions. They have a hard time getting their message out cleanly, though, when there’s someone around bringing up that old Newsweek article to discredit the whole discussion.
The Right Institution for Managing Social Problems Is Government
Social problems shouldn’t be resolved by corporations because we already have a large institution set up for that: government. If members of a society really are worried about carbon emissions or the disposal of toxic waste at chemical plants, then they should express those concerns to elected representatives who will, in turn, perform their function, which is to elaborate laws and regulations guiding the way all of us—inside and outside of business—live together. Government, the point is, should do its job, which is to regulate effectively, and those in the business world should do their job, which is to comply with regulations while operating profitably.
Underneath this division of labor, there’s a crucial distinction. Friedman believes that human freedom is based to some significant degree in economic life. Our fundamental rights to our property and to pursue our happiness are inviolable and are expressed in our working activities. The situation is complicated, however, because it’s also true that for us to live together in a society, some restrictions must be placed on individual action. No community can flourish if everyone is just doing what they want. There’s room for quite a bit of discussion here, but in general, Friedman asserts that while government (and other outside institutions) have to be involved in regulation and the imposing of limits, they shouldn’t start trying to mold and dictate basic values in the economic realm, which must be understood in principle as a bastion of individual liberty and free choices.
At this juncture, Friedman’s essay reaches its sharpest point. The notion of corporate social responsibility, Friedman asserts, is not only misguided; it’s dangerous because it threatens to violate individual liberty. Stronger, the violation may ultimately lead to socialismIn the economic world, the subordination of individual liberty to the general welfare., the end of free market allocation of resources because rampant political forces take control in the boardroom.
The movement to socialism that Friedman fears comes in two steps:
- Environmental activists, social cause leaders, and crusading lawyers will convince at least a handful of preening business executives that working life isn’t about individuals expressing their freedom in a wide-open world; it’s about serving the general welfare. The notion of corporate social responsibility becomes a mainstream concern and wins wide public support.
- With the way forced open by activists, the risk is that government will follow: the institution originally set up to regulate business life while guaranteeing the freedom of individuals will fall into the custom of imposing liberty-wrecking rules. Under the weight of these intrusive laws, working men and women will be forced to give up on their own projects and march to the cadence of government-dictated social welfare projects. Hiring decisions, for example, will no longer be about companies finding the best people for their endeavors; instead, they’ll be about satisfying social goals defined by politicians and bureaucrats. Friedman cites as an example the hiring of felons. Obviously, it’s difficult for people coming out of jail to find good jobs. Just as obviously, it’s socially beneficial for jobs to be available to them. The problem comes when governments decide that the social purpose of reinserting convicts is more important than protecting the freedom of companies to hire anyone they choose. When that happens, hiring quotas will be imposed—corporations will be forced to employ certain individuals. This intrusive workplace rule will be followed by others. All of them will need to be enforced by investigating agents and disciplining regulators. As their numbers grow and their powers expand, freedom will be squeezed. Ultimately, freedom may be crushed by, as Friedman puts it, “the iron fist of Government bureaucrats.”
It’s difficult to miss the fact that Friedman’s worries were colored by the Cold War, by a historical moment that now feels remote in which the world really did hang in the balance between two views of working life: the American view setting individual freedom as the highest value and the Soviet view raising collectivism and the general welfare above all personal economic concerns and liberties.
Still, and even though today’s historical reality is quite different from the 1970s, the essence of Friedman’s objection to CSR hasn’t changed. It’s that you and I get to be who we are by going out into the world and making something of ourselves. When our ability to do that gets smothered beneath social responsibility requirements, we may help others (or possibly not), but no matter what, we sacrifice ourselves because we’ve lost the freedom to go and do what we choose. This loss isn’t just an inconvenience or a frustration: it’s the hollowing out of our dignity; it’s the collapse of our ability to make ourselves and therefore the end of the opportunity to be someone instead of just anyone.
The Best Way for Corporations to Be Socially Responsible Is to Increase Profits
The final major argument against corporate social responsibility in its various forms is that the best way for most corporations to be socially responsible is to contribute to the community by doing what they do best: excelling in economic terms. When corporations are making profits, the money isn’t just disappearing or piling up in the pockets of the greedy super rich (though some does go there); most of it gets sent back into the economy and everyone benefits. Jobs are created, and those that already exist get some added security. With employment options opening, workers find more chances to change and move up: more successful corporations mean more freedom for workers.
Further, corporations don’t get to be successful through luck, but by delivering goods and services to consumers at attractive prices. Corporate success, that means, should indicate that consumers are doing well. Their quality of life improves as their consumer products improve, and those products improve best and fastest when corporations are competing against each other as freely as possible.
What about the public welfare in the most general sense, the construction of parks, schools, and similar? Here, too, corporations do the best for everyone by concentrating on their own bottom line. More hiring, sales, and profits all also mean more tax revenue flowing to the government. And since elected governmental entities are those organizations best equipped to do public good, the most a corporation can hope for with respect to general social welfare is to succeed, and thereby generate revenues for experts (or, at least democratically elected officials) to divide up wisely.
The term marketplace responsibilityThe twin views that the notion of corporate social responsibility is misguided and dangerous, and the corporate purpose of profit maximization serves the social welfare while cohering with the value of human freedom that should be paramount in business ethics., finally, names the economic and social (and political) view emerging from Friedman’s arguments. The title doesn’t mean ethical responsibility in the marketplace so much as it does the specific conception of ethical responsibility that the open marketplace produces. It has two aspects: first, the notion of corporate social responsibility is misguided and dangerous, and second, the corporate purpose of profit maximization serves the social welfare while cohering with the value of human freedom that should be paramount in business ethics.
Conclusion: Corporate Social Responsibility versus Marketplace Responsibility
Advocates of corporate social responsibility believe corporations are obligated to share the burden of resolving society’s problems. They maintain that the responsibility stands on pure moral grounds. More, there are operational reasons for the responsibilities: if businesses are going to contaminate the environment or cause distress in people’s lives, they should also be actively working to resolve the problems. Finally, there’s the strong argument that even if the corporate purpose should be to make profits, social responsibility is an excellent way to achieve the goal.
Advocates of marketplace responsibility—and adversaries of the corporate social responsibility model—argue that by definition corporations can’t have moral responsibilities. Further, to the extent ethical obligations control corporate directors, the obligations are to shareholders. More, corporate directors aren’t experts at solving social problems, and we already have an institution that presumably does have expertise: government. Finally, there’s a strong argument that even if the corporate purpose should include broad social responsibilities, free individuals and corporations in the world making profits is an excellent way to achieve the goal.
- The first argument against theories of corporate social responsibility is corporations can’t have ethical responsibilities.
- The second argument is corporate executives are duty bound to pursue profits.
- The third argument is corporations are ill-equipped to directly serve the public good.
- The fourth argument is social issues should be managed by government, not corporations.
- The fifth argument is marketplace ethics reinforce human freedom and corporate social responsibility threatens society with socialism.
- The sixth argument against theories of corporate social responsibility is the best way for corporations to serve the public welfare is by pursuing profits.
- What does it mean to say that, in ethical terms, a corporation is no different from a wrench?
- What primary responsibility do corporate directors have to shareholders? Why do they have it?
- Why should social issues be managed by government and not corporations?
- What is the connection between corporate social responsibility and the threat to freedom posed by socialism? How does socialism limit freedom?
- What is an example of a company doing good by doing well—that is, making profits—and for that reason improving the general welfare? How can the example be converted into an argument against the theory of the corporation as having social responsibilities?
A reader asks:
I'd like to more clearly understand Milton Friedman's (and others as necessary) views on corporate social responsibility. Did Friedman believe it was inappropriate for corporations to do all they could to minimize potentially injurious "externalities" such as toxic waste dumps or harmful work environment that result from the corporations’ activities in pursuit of their business and its profitability?
What are a corporation’s “social responsibilities?” Milton Friedman’s well-known response is: “a corporation’s responsibility is to make as much money for the stockholders as possible.” At first blush this sounds uncivil, severe, potentially even cruel. What about worker safety? Pollution? Child labor in less-developed countries? Are issues like these to be ignored by corporations? This indeed sounds like an uncivil, potentially unpleasant society.
But dig a little deeper, think about the issues as an economist would, and we see that there is no contradiction between corporations pursuing profit and a civil and civilized society. An economist would recognize that Friedman’s admonition (that firms should only pursue profits) is a good route to a civil and civilized society. Friedman (I have no doubt) would have argued that it is more likely to produce social good than exhortations or rules that firms should be “socially responsible”.
The explanation lies in the second, less-well-known part of Friedman’s famous statement (the italicized phrase, with my emphasis added): “In [a free economy] 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.” (Capitalism and Freedom, University of Chicago Press, 2002 Fortieth Anniversary Edition, p 133).
Although it is generally the first part of the statement we remember, the second is equally important. Friedman says a few sentences later: “It is the responsibility of the rest of us to establish a framework of law such that an individual in pursuing his own interest is, to quote Adam Smith again, ‘led by an invisible hand to promote an end which was no part of his intention.’” (p. 133). It is that framework of law― rules around issues such as property rights, liability, and so on―hat push profit-maximizing firms to behave “responsibly” (or irresponsibly).
Take as an example pollution externalities. If these are important and controlling them is an important social end, then the political process and the legal system are the appropriate forum to “establish a framework of law.” Property rights and liability laws that hold a firm responsible for pollution compel the firm to take those external costs into account; firms internalize the external costs. The firm still maximizes profits, but the profits account for the pollution costs now included in the cost of doing business.
An economist would argue, as does Friedman, that “If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self-selected private individuals decide what the social interest is?” The appropriate forum for such decisions is the political and legislative arena or the legal system. The pros and cons of such policies can be debated and voted upon, or adjudicated according to precedent and law.
An economist argues for effective means to manage externalities and other social responsibilities. It is neither efficient nor reliable to impose ill-defined social responsibilities that may be open to arbitrary interpretation by firm managers. It is far better to establish a framework of law that will clearly and transparently induce the firm to internalize costs. Within that framework, firms should single-mindedly pursue profit maximization.
In the end I do not believe Friedman thought it inappropriate for corporations to do all they could to minimize potentially injurious externalities. I think Friedman’s argument was about the means more than the end. He was arguing, even if such ideas seem counterintuitive at first blush, that single-minded profit maximization (allied with an appropriate framework of law) would be more likely to produce social good than exhortations that firms be socially responsible.
―Thomas S. Coleman, AM’81, PhD’84,