Professor Boris Durisin from ESCP Business School discusses Milton Friedman’s claim that the social responsibility of business is to increase profits and points to the prevalence of civic responsibilities
Scholars who propose that “business for good” is an integral part of any business activity are faced with a wall of scepticism and cynicism, especially among those who affirm that the social responsibility of business is to increase profits and maximize shareholder returns. The most iconic proponent of the latter seems to be Milton Friedman and, in particular, his piece published in The New York Times in September 1970. His essay is based on a series of argumentation lines that might not stand up to the analytical rigor that he calls on businessmen to uphold. If the thinking is flawed, the whole idea might be flawed.
Promoting a free society where the principal is not free to choose
Milton Friedman made statements that I will question. For example, Friedman writes in the concluding sentence that in a free society “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.” Ironically, this statement dictates to the principal – business owner – what his goal should be. In fact, it implies that it is not the free choice of the principal to choose what he wants the agent – businessman/manager – to pursue.
Principals provide capital to the enterprise to fulfil its purpose. This does not imply that the purpose of the enterprise is set to be the pursuit of profits. This is not to question per se the conceptual argument that an investment is fraught with risks, that different investments exhibit different risks, and that therefore differences in risk profiles can be rewarded differently. Even though it is clear that any investment is fraught with risk, it is not clear why individuals (and principals as individuals) are required to seek a return on the investments they make. They are not. Individuals do not do so on so many occasions in their daily lives. Individuals make many monetary investments in many activities and in many relationships without seeking a financial return. The principals define the purpose of the corporation, not economists.
Capital has no responsibility to humans or to the planet
Individuals as principals and as agents cannot put a responsibility on capital that capital does not have. Money is the foundational medium of exchange in our developed societies. Capital, in the form of money as a medium of exchange or of value storage, does not exhibit any responsibility. Human beings have a responsibility, capital does not. The very fact that money has no responsibility implies that humans are required to take on their responsibilities. Arguing that humans (as agents or as principals) have the responsibility to reward to the greatest extent the risk of a monetary investment (in a corporation) implies giving responsibility to money that money does not have. Money (or a monetary investment) does not require reward. No principal has the obligation per se to maximize returns on the capital invested. It is a human choice; it is not an obligation. Individuals cannot logically claim that their individual choices become an obligation.
Humans have civic responsibilities toward other humans and they have civic responsibilities toward the planet. Individuals have responsibility. Capital has no responsibility; it is deployed to fulfil a purpose.
Customers do not fall from heaven
Milton Friedman stated that “insofar as [a business executive’s] actions in accord with his ‘social responsibility’ […] raise the price to customers, he is spending the customers’ money.” The reasoning behind this statement is unclear: the businessman is not spending the customers’ money. It is the free choice of the customers to spend their money on the offering of the corporation and to pay the price(s) that the corporation charges.
It is rather the other way around: it is not clear why companies should take it for granted that customers would reward companies that seek to maximize shareholder returns with their business. The reason for any corporation to exist in a competitive marketplace must be earned and re-earned. Customers do not fall from heaven. Corporations need to earn the customer’s business. Business can only exist if customers do not object to their conduct and reward them with their purchases or usage.
The proponents of the shareholder theory regard the customer only as a means to an end. Accordingly, corporations are not in business to obtain a return from offering a superior value proposition to their target customers; corporations are in business to build a portfolio of customers generating directly or indirectly the highest obtainable cash flows. Capital deployed is no longer regarded as a means for the enterprise to serve customers to fulfil a purpose; customers are there to serve capital.
For proponents of the Friedman doctrine, the social responsibility of business is to exploit customers; ultimately, it is to exploit humankind for their private profit. It is not clear why customers should spend their money on the offerings of companies whose leaders aim at exploiting them. Customers might well object to rewarding those companies with their business.
As our societies evolve, laws, customs, and etiquette evolve with them. Ultimately, individuals cannot claim to be legitimate when they replicate a behaviour that previously went unquestioned. Citizens alter their conduct as the state of affairs evolves, and conduct once considered authoritative might no longer be deemed acceptable. Paraphrasing Hannah Arendt, we have only for a moment to imagine what would happen to the Friedman doctrine if enough people were to refuse their support, even without active resistance or rebellion, to see how effective this would be. Companies claiming that they are in business to maximize shareholder returns might no longer be considered “worthy” of the customer’s money, as expressed by customers in their choices.
A reason to exist
It is the responsibility of a business to engage in open and free competition without deception or fraud. It is not the responsibility of a business to use it resources and to engage in activities designed to exploit humankind and nature. It is the responsibility of a business to fulfil its purpose as requested by its principal(s). Companies that claim that their purpose is to maximize shareholder returns might not have a reason to exist in our society as expressed by citizens as customers through their individual choice of no longer rewarding these companies with their business. Unless we want to live in a society in which the only reason for individuals to build relationships with others is to exploit them, the responsibility of a business is not and cannot be to increase its profits per se.