On Business: Milton Friedman Is Wrong About Social Responsibility

Social Responsibility — the new business imperative
Social Responsibility — the new business imperative
Image credit: bearsky23/Shutterstock.com

The Business Roundtable statement brought economist Milton Friedman to the front pages again. The Wall Street Journal challenged us to read his 1970 essay on the social responsibility of business. I did, and it is wrong for today.

When the Business Roundtable announced a shift from shareholder to stakeholder value, some cheers rose with a strong mix of skepticism. Milton Friedman became headline news again, and The Wall Street Journal challenged business leaders to read his complete 1970 essay entitled “The Social Responsibility of Business is to Increase its Profits” (PDF). A 2019 300-word statement signed by 181 U.S. CEOs stirred joys and concerns. Take The Wall Street Journal challenge and read the Friedman essay. I did.

Setting the Stage: The Business Roundtable and Milton Friedman

Before diving in, a few definitions are necessary. First, the Business Roundtable is an association of America’s leading corporate CEOs, focusing on policy to keep a thriving economy. Through the 1980s and until 1997, the Business Roundtable espoused the principle of weighing the interests of all stakeholders. In 1997, this shifted to a primacy of shareholders, leaving the other stakeholder subordinate to them. Now, in 2019, the Business Roundtable returned to a focus on all stakeholders — customers, employees, suppliers, communities, and shareholders — due to a “fraying” of the American dream.

Where does Milton Friedman come in? A University of Chicago economist, Friedman argued for the primary mission of a corporation is to maximize shareholder value within the “rules of the game.” Maximizing shareholder value drove many companies to manage its operations in this manner, leading to high CEO-to-worker pay gaps, share buybacks, and short-term planning and results. Of course, others believe it led to solid economic and market returns. The debate of shareholders versus stakeholders is taking center stage within the current presidential election debates.

Undoing Milton Friedman

The undoing of Friedman’s focus on shareholders above all others has been happening for some time. The Conscious Capitalism movement, started in 2013, focuses on all stakeholders and works toward a more elevated way of conducting business. Even before this time, several business partners started the B Corp, or Benefit Corporation, shift. Believing business can — and should be — a force for good, B Corp launched a certification program to hold business accountable to standards of “how your company’s operations and business model impact your workers, community, environment, and customers.” Today, there are over 2,500 Certified B Corps in more than 50 countries.

The University of Chicago also began to modify Friedman’s aggressive manifesto. In 2017, through the work of two professors — Oliver Hart, Harvard University, and Luigi Zingales, University of Chicago — introduced the need for maximizing for shareholder welfare since shareholders are concerned not just about money but also for the quality of society (PDF). Hart and Zingales argue that maximizing shareholder welfare takes into account the shareholder’s social values, and shareholders should be able to propose, promote, and vote on policies that support certain societal values.

Social responsibility and stakeholder value capture the attention of business leaders and business school professors. Still, Friedman’s legacy lives on within the business community, and the Business Roundtable’s statements are just words with little substance right now. Reading his original essay is important to understand what has changed and why social responsibility and stakeholder value matter more today than before.

Milton Friedman’s Assertions and Why Social Responsibility Matters Now (More than Before)

Reading and thinking through the source is a good practice. It is worth your time to read Friedman’s 1970 essay, just as I have done. My thoughts from his essay are forthcoming below. Your thoughts may be different, and that is OK. Gaining a good conversation on the role of business in society is a productive one. Capitalism was never intended to be a static system. We need good policy conversations to continue to evolve a system designed to maintain moral and ethical standards through economics.

When discussing business and its responsibilities, Friedman states only people have responsibilities. A corporation is an “artificial person.” Since a business is not a person, it does not have social responsibilities. Business as a force for good is impossible. A corporation needs to stay within the “rules of the game,” but that is all it needs to do (other than maximize shareholder value).

While a business consists of individuals, a corporation is not an individual being. However, what Friedman missed is how a corporation has gained more civil rights than many individuals. Corporations gained civil rights more quickly than minority groups. As UCLA law professor, Adam Winkler, documents, corporations have become a person, given the freedom of speech, religion, and more.

With the history of civil rights gained by corporations, they are no longer an artificial person. Just as individuals have a social responsibility, corporations must now as well.

Charity begins at home is not biblical, but it is an idea of taking care of your family before others. Friedman believed a corporate manager is “a person in his own right.” Consequently, a corporate manager can do charitable good outside of their day job. When a corporate leader leaves work, they can dedicate their time and money to certain causes. Similarly, employees, customers, or stockholders can do the same. However, a business leader is an agent of the corporation, and the social responsibility ends within the operations of the business since it is “someone else’s money.”

Given the discussion in the previous point, the logic fails today. Corporations have civil rights, and therefore, they have responsibilities to do good for the greater society, as individual citizens do. Just as an individual manages their household to break even and save for future initiatives, corporate leaders do as well. Also, just as individuals carve certain time and money for good causes, corporate leaders need to do so as well.

Citizens with civil rights have societal responsibilities — both for individuals, corporations, and business leaders.

Friedman warns of social responsibility becoming “window-dressing.” If the public describes a corporation as being “soulless,” then a business could undertake certain charitable actions to counter this opinion. However, wrapping actions in an insincere charitable wrapper carries disdain and approaches fraud, as described by Friedman. In this sense, he is right. Today, if a company makes hollow claims, then they can be accused accurately as “green-washing” or “woke-washing.” In these instances, Friedman is right in describing the companies as “incredibly short-sighted and muddle-headed.”

While Friedman is correct in describing insincere corporate social responsibility actions as being harmful to society, he was not promoting corporations to pursue meaningful social responsibility initiatives. Today, many corporations understand the good business behind being a good corporate citizen. In a McKinsey study, many business leaders — including chief financial officers — see corporate social responsibility programs adding value to their business and shareholders. The key areas of value-add include:

· Maintaining good brand equity

· Attracting and retaining talent

· Meeting society’s expectations of good corporate behavior, and

· Improving operational efficiency.

Real corporate social responsibility produces real results. No window-dressing required, just solid and meaningful initiatives to be a force for good in business and society.

In Friedman’s essay, the one concession he makes is for businesses in small communities. If a company is a major employer within a small city, then it may be to their benefit to improve the community and its government. As with corporate social responsibility programs today, these initiatives can make it easier to “attract desirable employees.” Friedman added how corporations in these smaller cities could give charitably and then reduce corporate taxes. How can it be acceptable to be a good corporate citizen only in small communities but not the larger society?

The change today is how all business is local. Stated clearly — business has a responsibility to bigger social responsibilities since climate change, poverty, pay inequity, gender discrimination, and many other issues impact communities locally. Businesses have an impact on communities outside of where their office buildings are, so they need to do good for as many communities as they can. Likewise, these issues impact all shareholders as they do other stakeholders. Social responsibility is interwoven through the business and their constituents.

Social Responsibility is a Corporate Responsibility

Times have changed since Friedman’s 1970 essay, and corporations have changed. Social responsibility is embedded in business. Doing good is good business and good for society. Doing good is connective.

Maximizing societal welfare can happen by maximizing stakeholder welfare. It is a balance. Corporations need to make a profit to grow their business, develop new products, engage team members, foster partnerships, delight customers, and pursue better programs. Within each stakeholder initiative, a societal view can foster better business decisions.

We can now recognize times have changed. The social responsibility of business is to increase its efforts to be good, responsible, and ethical corporate citizens. Corporate citizens have a responsibility to increase their positive societal impacts.

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Written by

Collaborative Strategist + Thought Entrepreneur at Juncture of Business + Society ❖ Mobilizing Insights Into Belief-Based Action ❖ Leadership Doctorate Student

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