Rethinking the Social Responsibility of Business

Thirty-five years ago, Milton Friedman wrote a famous article for The New York Times Magazine whose title aptly summed up its main point: "The Social Responsibility of Business Is to Increase Its Profits." Friedman had no patience for capitalists who claimed 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 reformers." Friedman wrote that such people are "preaching pure and unadulterated socialism.

Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades." John Mackey, the founder and CEO of Whole Foods, is one businessman who disagrees with Friedman. Mackey believes Friedman's view is too narrow a description of his and many other businesses' activities, and he further argues that Friedman's take woefully undersells the humanitarian dimension of capitalism. 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. Mackey, however, strongly disagrees, “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.” Mackey wants it known that he is not against profit. When he co-founded Whole Foods Market (WFM), they began with $45,000 in capital and only $250,000 in sales their first year.

Twenty-seven years later, they had sales of more than $4.6 billion and net profits of more than $160 million. However, WFM did not achieve their tremendous increase in shareholder value by making shareholder value the primary purpose of our business, they measured success by how much value we can create for all six of our most important stakeholders: customers, team members (employees), investors, vendors, communities, and the environment. Many thinking people accept 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?

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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. However, Mackey feels that the argument is not wrong so much as it is too narrow. There can be little doubt that a certain amount of corporate philanthropy is simply good business and works for the long-term benefit of the investors. For example: In addition to the many thousands of small donations each WFM store makes each year, they also hold five 5% Days throughout the year. On those days, WFM donates 5 percent of a store's total sales to a nonprofit organization. While WFM selects worthwhile organizations to support, they also tend to focus on groups that have large membership lists, which are contacted and encouraged to shop our store that day to support the organization. This usually brings hundreds of new or lapsed customers into our stores, many of whom then become regular shoppers. So a 5% Day not only allows WFM to support worthwhile causes, but is an excellent marketing strategy that has benefited Whole Foods investors immensely. However, Mackey feels that ultimately the company founders, not the current investors in a company's stock, have the right and responsibility to define the purpose of the company. When WFM first announced that they would donate 5% of the company's net profits, all seven of the private investors voted for it when they served on our board of directors. When they brought in new investors, none of them objected to the policy. Moreover, in almost 14 years as a publicly traded company, almost no investors have ever raised objections to the policy. How can WFMs' philanthropy be "theft" from the current investors if the original owners of the company unanimously approved the policy and all subsequent investors made their investments after the policy was in effect and well publicized?

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; or, they always have the legal right to submit a resolution to change the company's philanthropic philosophy. Another objection to the WFM philosophy is where to draw the line. If donating 5 percent of profits is good, wouldn't 10 percent be even better? Why not donate 100 percent of our profits to the betterment of society? But the fact that WFM has responsibilities to its community doesn't mean that they don't have any responsibilities to their investors. It's a question of finding the appropriate balance and trying to create value for all of their stakeholders. Is 5% the "right amount" to donate to the community? Mackey thinks that “there is no right answer to this question, except that 0 percent is too little.” Corporate philanthropy is a good thing, but it requires investor approval. Most investors understand that philanthropy can be beneficial to both the corporation and to the larger society. WFM donates money to the community stakeholder because, as Mackey explains, “human nature isn't just about self-interest. It also includes sympathy, empathy, friendship, love, and the desire for social approval.” When we were small children we were egocentric, concerned only about our own needs and desires. As we mature, most people grow beyond this egocentrism and begin to care about others--their families, friends, communities, and countries. People’s capacity to love can expand even further: to loving people from different races, religions, and countries--potentially to unlimited love for all people and even for other sentient creatures.

This is our potential as human beings, to take joy in the flourishing of people everywhere. Mackay says, “WFM gives money to communities because we care about them and feel a responsibility to help them flourish as well as possible.” Friedman, on the other hand, says Mackey’s belief that "corporate philanthropy is a good thing" is wrong. When the founding members of WFM decided to donate 5% of net profits, they were clearly within their rights in doing so. They were spending their own money. However, “why do they think the 5% donation would do more good for society than taking the money, investing it, paying out the profits as dividends, and then letting the stockholders dispose of it?” asks Friedman. This in turn would create more jobs because someone has to manufacture what the stockholders bought. In addition, factories and roads have to be built to make the products that the stockholders had bought. Someone has to sell the products that the stockholders just purchased. In effect, the 5% could be turned into a real investment which translates into permanent jobs and income for people, not one time handouts. WFM's contribution to society is to enhance the pleasure of shopping for food. WFM has no special competence in deciding how charity should be distributed. Any funds devoted to philanthropy would surely have contributed more to society if they had been devoted to improving the shopping for food.

T.J. Rodgers, CEO of Cypress Semiconductor, offers another view of a company’s responsibility to its community. He views it as good business when a company caters to its customers, train and retain its employees, build long-term positive relationships with its suppliers, and become a good citizen in its community, including performing some philanthropic. His interpretation of Friedman’s comments that a company should stay "within the rules of the game" and operate "without deception or fraud," he [Friedman] meant it should deal with all its various constituencies properly in order to maximize long-term shareholder value. He does not mean that a company should put every last nickel on the bottom line every quarter, regardless of the long-term consequences. Insofar as philanthropy and community service, Cypress Semiconductor has won the trophy for the Second Harvest Food Bank competition for the most food donated per employee in Silicon Valley for the last 13 consecutive years (1 million pounds of food in 2004). The contest creates competition among Cypress’s divisions, leading to employee involvement, company food drives, internal social events with admissions "paid for" by food donations, and so forth. It is a big employee morale builder, a way to attract new employees, good public relations for the company, and a significant benefit to the community--all of which makes Cypress a better place to work and invest in. Rodgers views WFMs philanthropy with skepticism, “Why is it that when Whole Foods gives money to a worthy cause, it serves a high moral objective, while a company that provides a good return to small investors--who simply put their money into their own retirement funds or a children's college fund--is somehow selfish?” Rodgers finds the philosophy and motives of WFM objectionable, not the specific actions. “There is the arrogant thinking that if other corporations would simply emulate the higher corporate life form defined by WFM, the world would be better off.”

Friedman thinks the differences between himself and John Mackey on the issue of social responsibility of business are for the most part rhetorical. Mackey, however, disagrees, “We are thinking about business in entirely different ways. Friedman is thinking only in terms of maximizing profits for the investors. If putting customers first helps maximize profits for the investors, then it is acceptable. If some corporate philanthropy creates goodwill and helps a company "cloak" its self-interested goals of maximizing profits, then it is acceptable (although Friedman also believes it is "hypocritical").” In contrast to Friedman, Mackey does not believe maximizing profits for the investors is the only acceptable justification for all corporate actions. The investors are not the only people who matter. Corporations can exist for purposes other than simply maximizing profits. Mackey concedes that many other businesses, such as Cypress Semiconductor, have been created by entrepreneurs whose sole purpose for the business is to maximize profits for their investors.

Does Cypress therefore have any social responsibility besides maximizing profits if it follows the laws of society? No, it doesn't. Rodgers apparently created it solely to maximize profits, and therefore all of Friedman's arguments about business social responsibility become completely valid. Business social responsibility should not be coerced; it is a voluntary decision that the entrepreneurial leadership of every company must make on its own. While Friedman believes that taking care of customers, employees, and business philanthropy are means to the end of increasing investor profits, Mackey believes that “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 business live just to make profits.” Friedman contends that "the social responsibility of business [is] to increase its profits" and my statement that "the enlightened corporation should try to create value for all of its constituencies" are "equivalent."

He argues that maximizing profits is a private end achieved through social means because it supports a society based on private property and free markets. 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. It is right up there with William Vanderbilt's "the public be damned" and former G.M. Chairman Charlie Wilson's declaration that "what's good for the country is good for General Motors, and vice versa."

If we are truly interested in spreading capitalism throughout the world, 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. Friedman and Rodgers probably will never agree with Mackey’s business philosophy. Mackey feels that his philanthropic philosophy will result in a more robust business model than the profit-maximization model because his philosophies encourage and tap into more powerful motivations than self-interest alone. According to Mackey, his ideas “will triumph over time, not by persuading intellectuals and economists through argument but by winning the competitive test of the marketplace. Someday businesses like Whole Foods, which adhere to a stakeholder model of deeper business purpose, will dominate the economic landscape. Wait and see.”

Note: Thomas Malthus was not the author of the article. I put his name as the author, so you have a name to use as a reference when you summarize and answer the midterm questions.

Source: Reason (2005). Rethinking the Social Responsibility of Business: A Reason debate featuring Milton Friedman, Whole Foods' John Mackey, and Cypress Semiconductor's T.J. Rodgers. Retrieved from http://reason.com/archives/2005/10/01/rethinking-the-social-responsi

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