The social responsibility of business is to increase its profits

Honest Work

Chapter 6: Is “The Social Responsibility of Business … to Increase Its Profits”?

Social Responsibility and Stakeholder Theory

The Conflict

Should businesses be concerned only with maximizing profits for shareholders?

Friedmanites, Shareholder Theory

Or, should businesses also be concerned about how their decisions affect the community in which they operate?

Anti-Friedmanites, Stakehoder Theory

“The Social Responsibility of Business Is to Increase Its Profits” Milton Friedman (1970)

For Friedman, the market represents free choices persons make and profit is the expression of those choices

Maximum profits mean maximum good in a market society

“Social responsibility” contrary to purpose of business

Would interfere with structure of free market

“The Social Responsibility of Business Is to Increase Its Profits” Milton Friedman (1970)

Responsibility

Businesses are artificial entities, and cannot hold real responsibilities

Individual persons hold responsibilities

Which individuals are we talking about?

Corporate executives hold responsibilities toward their employers

Usually, make as much money as possible within confines of society’s rules

Difference between acting as an agent and as a principal

As employee of owners, a corporate executive acts as an agent, based on employer’s desires

As an individual, a person acts on their own interests and desires as a principal

Social responsibilities apply to principals (individual choice), not agents (acting according to employer’s choice)

“The Social Responsibility of Business Is to Increase Its Profits” Milton Friedman (1970)

When a corporate executive (as an agent) acts according to some principle of “social responsibility,” he or she acts wrongly

Reduce shareholders returns

Raising customer prices

Lowering employee wages

In each case, he or she is spending someone else’s money

“The Social Responsibility of Business Is to Increase Its Profits” Milton Friedman (1970)

Political consequences

Business person taking on responsibility of the government

Converts the meaning of business from a private enterprise to that of public service without proper political channels of election

Based on Smith’s notion that each doing for their own interest will result in good for society

“The Social Responsibility of Business Is to Increase Its Profits” Milton Friedman (1970)

Find three flaws in Friedman’s argument that the only social responsibility of a business is to increase its profits.

“Why Shouldn’t Corporations Be Socially Responsible?” Christopher D. Stone (1975)

Identifies four positions used in arguing against social responsibility of business

Each based on idea that corporate managers should be guided by profit rather than the good of society

Why would this be true of business people when not true of humans in other circumstances?

The promissory argument

The agency argument

The role argument

The “polestar” argument (Friedman)

“Why Shouldn’t Corporations Be Socially Responsible?” Christopher D. Stone (1975)

The Promissory Argument

Management promises to maximize shareholders’ profits

Response

The relationship between shareholders and managers cannot be compared to other relationships in which “promises” carries moral claim

Sometimes it is morally justifiable to break promises

Does not necessarily mean to maximize in every way possible in every set of circumstances

“Why Shouldn’t Corporations Be Socially Responsible?” Christopher D. Stone (1975)

The Agency Argument

Shareholders designated managers as their agents

Response

Why would managers be agents of shareholders and not of other entities?

Problems with aligning this argument with how businesses actually operate, in which managers have rebelled against wishes of shareholders

“Why Shouldn’t Corporations Be Socially Responsible?” Christopher D. Stone (1975)

The Role Argument

Corporate managers as fiduciaries, restricted in action to what is appropriate to that role

Response

Pro-responsibility camp is not asking for anything requiring action outside reasonable activity of that role (father as an example)

Different moral obligations may hold differing levels of force, and this argument does not show why it would necessarily hold the most force

“Why Shouldn’t Corporations Be Socially Responsible?” Christopher D. Stone (1975)

The “Polestar” Argument

If managers maximize profits this will be to the benefit of everyone

Response

Friedman argues that managers are not in a position to judge what is good for society, that the market is the best tool for this

Judgment can be difficult, but many of our decisions are based on moral judgments and intuitions (even business decisions)

Friedman argues that people making decisions in regards to public goods should be publically elected

Why wouldn’t this apply to corporate directors as well, then?

There are circumstances in which the law and forces of the market are not adequate or competent to keep things under control

We need to identify where the traditional forces are inadequate

Conclusion: none of these arguments supports the conclusion that businesses should only seek profits

“Corporate Moral Agency” Peter A. French (1977)

Corporations as “moral persons” holding responsibilities

What sort of responsibility?

The person can be held responsible (they can be held accountable)

The action was intended or a result of an intentional act

There is a relationship of responsibility between the person and the moral community

“Corporate Moral Agency” Peter A. French (1977)

CID Structure as meeting requirements of intentionality

Organizational flow chart regulating corporate power structure

Incorporates the acts of biological persons

Corporate decision recognition rules

The “logic” by which a corporate entity operates

Corporations have “reasons” and “interests” and “goals” just as human beings have

“Corporate Moral Agency” Peter A. French (1977)

Response to some possible objections

The argument that corporations cannot be moral agents because they do not operate according to traditional human intent is an example of anthropocentric bias

Corporations are collectivities, but this does not necessarily rule out their moral agency and participation

“Corporate Moral Agency” Peter A. French (1977)

Explain French’s idea that corporations should be treated as full-fledged moral persons. What motivates this argument? What are his goals? What problems might this account provoke?

How is a corporation like a person? How are they different? Why might one argue that a corporation is or is not a moral agent?

How do internal decisions structures influence his account? Explain the significance of the CID.

“A Stakeholder Theory of the Modern Corporation” R. Edward Freeman (1994)

Argues that the modern corporation should be revamped to reflect that stakeholders—and not just shareholders—should decide how corporations act

Stakeholders are “those groups who have a stake in or a claim on the firm . . . [including] suppliers, customers, employees, stockholders, and the local community, as well as management”

Each has a right to not be treated as a means to an end

“A Stakeholder Theory of the Modern Corporation” R. Edward Freeman (1994)

The Attack on Managerial Capitalism: “In whose interest and for whose benefit should the firm be managed?”

The Legal Argument

Changes in legal system raises question of whether entities other than stockholders should have a claim

The Economic Argument

Economic realities make it difficult for management to act in the best interest of stockholders

Externalities, tragedies of the commons, monopoly power, etc.

“A Stakeholder Theory of the Modern Corporation” R. Edward Freeman (1994)

A Stakeholder Theory of the Firm

Extension of right of stockholders

Can be seen as application of Kant’s principle of treating persons as ends rather than means across all business relationships

“A Stakeholder Theory of the Modern Corporation” R. Edward Freeman (1994)

Who are the stakeholders?

Owners

Employees

Suppliers

Customers

Local Community

Competitors and government in an extension of the theory

Role of Management

Also a stakeholder

Responsible for keeping relationships among stakeholders in balance, since imbalance is bad for the firm

“Social Responsibility and Economic Efficiency” Kenneth J. Arrow (1973)

Nobel Prize–winning economist

Responds specifically to Friedman’s piece and explains why there must be certain regulations in place for the free market foundation of Friedman’s argument to work

A wholly unregulated free market will not produce the maximum good effects from maximum profits that is at the heart of Friedman’s argument

Argues that business could increase its efficiency and thus benefit from a professional moral code, strenuously taught and strictly enforced

“Social Responsibility and Economic Efficiency” Kenneth J. Arrow (1973)

The case against social responsibility

Profit proves that you are contributing to the greater good

Problems with this argument

Monopolies

Very unequal distribution of wealth

Discourages altruism

“Social Responsibility and Economic Efficiency” Kenneth J. Arrow (1973)

Two more cases where maximization of profits is socially inefficient

Cases such as pollution

The corporation doesn’t pay for the harm

Cases such as used car sales

The buyer doesn’t have full knowledge

Social Responsibilities

Regulation, taxes, and legal liability

Professional code of ethics

Physicians as examples

Confidence-inspiring as well as promoting efficiency

“Corporate Social Responsibility and Crisis” Richard Parker (2008)

Adolf Augustus Berle

Proposed controls on business to prevent another crash like the one in 1929

Government needs final responsibility

Modern corporations had failed stockholders as well as everyone else

Only government was powerful enough to codify rights of stakeholders

Businesses should be responsible to all stakeholders

Business should not be able to rule over the democratic process

“Corporate Social Responsibility and Crisis” Richard Parker (2008)

How is the current financial crisis similar to that of the Great Depression? How does Parker frame these similarities? Does Berle’s analysis of the financial situation of yore bear any relevance to today?

“Business Ethics Gone Wrong” Alexei M. Marcoux (2000)

Discusses three major problems he sees with stakeholder theory and argues for an alternative business ethics

Problems with Stakeholder Theory

Undermines the value of shareholder property

Makes it harder to discipline self-serving managers

Allows politics and interest groups into business, reducing efficiency

Need for articulation of an alternative business ethic

Based on values of honesty, integrity, and fair play

Additional Resources

Find tons of resources on Business for Social Responsibility website

The Corporate Social Responsibility Newswire website