Friedman vs Carroll Corporate Social Responsibility & Outsourcing


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Friedman vs Carroll Corporate Social Responsibility & Outsourcing

  1. 1. Friedman vs. CarrollCorporate Social Responsibility & Outsourcing Andrew Olsen University of Maryland University College
  2. 2. Corporate citizenship is mainly about running a business well, obeying the law,paying taxes, and being a good neighbor like any responsible citizen. Friedman hasargued that it is in an organization and society’s best interest for the organization topursue its most profitable decisions within the law. Mr. Friedman fails to realize thatlaws, ethics, and social norms are not constant across the world. In addition, focusingsolely on the bottom line ignores the intangibles that directly impact a firm’sproductivity, efficiency, and profitability: worker satisfaction and morale, existingsupplier and channel relationships and community relationships that translate into supportfor an organization. Friedman (1970) argues that “in a free society there is one and only one socialresponsibility of business—to use its resources and engage in activities designed toincrease its profits so long as it stay within the rules of the game…” The problem is whatare included in “activities to increase profits” and what constitutes the “rules of thegame”? Furthermore, Business ethicists contend that Friedman neglects all of the ethicalissues for the sake of a purely economic approach and he totally rejects the idea that anyother group can have a stake in the corporation’s actions (Wilcke, 2004). However, thisview of economic self-interest being the primary or even only motivation for business isout of place. Businesses have even rejected it in varying degrees. Per Handy: “DavePackard once said, ‘I think many people assume, wrongly, that a company exists simplyto make money. While this is an important result of a company’s existence, we have togo deeper and find the real reasons for our being. As we investigate this we inevitablycome to the conclusion that a group of people get together and exist as an institution thatwe call a company so that they are able to accomplish something collectively that they
  3. 3. could not accomplish separately’.” Business transactions rely to a large extent on socialnorms and values, which emphasize the importance of adopting an ethical approach tobusiness. You can no longer separate business from society. Friedman’s theoryoverlooked a business decisions in the ethical and social responsibility realms couldaffect many different people, groups, and institutions, which, in turn, can influence theorganization’s well being. Whereas Friedman said that the primary stakeholder ofconcern in business decision making is the stockholders/owners, subscribers to the ideaof a corporate social contract take the short- and long-term interests of other parties intoaccount too. He does acknowledge that customers and employees have a stake in theorganization, but he does not agree with the fact that customers and employee’s interestsare not equal to the shareholders’ interest. It is imperative to realize that business decisions often impact large numbers ofindividuals, groups, or institutions, i.e., stakeholders. According to Carroll: “Decades ofstudying businesses’ corporate social performance, their activities that extend beyondprofit-making, and their contributions to the community lead one to conclude thatcorporate citizenship is real – it is expected of business by the public, and it is manifestedby many excellent companies. Further, corporate citizenship addresses the relationshipbetween companies and all their important stakeholders…” not just stockholders. The problem is that Friedman ignores conscience-oriented motives and ethicaldilemmas by creating a smoke-screen theory that moral principles should be swept underthe rug when looking to outsource labor to under privileged workers in the pursuit tomaximizing profits. Instead of trying to implement change or improve the domestic jobmarket, Friedman suggests that corporations should looker to cheaper labor markets.
  4. 4. This theory abandons a corporation’s responsibility to the community and indicates thatthe corporation is only willing to work with labor markets that fulfill its demandingrequirements. These types of actions show that Friedman’s theory is for fickle companiesthat practice backstabbing methods towards domestic labor markets. Per Handy: “Almost60 years later, the European management writer Arie de Geus argued that companies diebecause their managers focus on the economic activity of producing goods and servicesand forget that their organization’s true nature is that of a community of people.”Cultivating a sense of community generates a “feeling of security that makes innovationand experimentation possible and the loyalty and commitment that can see a companythrough bad times.” Outsourcing weakens the already fragile relationships betweenemployees and employers; continued job loss will affect a company’s ability to performefficiently because they will be spending a lot of time dealing with people issues(Pfannenstein and Tsai, 2004). In a recent survey of mangers in 900 US companies, themajority of respondents reported difficulty communicating with offshore suppliers andmeeting deadlines (Hemphill, 2004, as cited by Engardio, et al., 2003). According toRoberts: Outsourcing is labor arbitrage, “Companies producing for U.S. markets aresubstituting cheap labor for expensive U.S. labor. The U.S. loses jobs and also the capitaland technology that move offshore to employ the cheaper foreign labor. Economistsargue that this loss of capital does not result in unemployment but rather a reduction inwages. Forrester Research estimated that the number of US computer-related jobs beingoutsourced globally will grow from 27,171 in 2000 to a cumulative total of 472,632 by2015 and by 2015, a total of 3.3 million jobs and $136 billion in wages will transfer fromthe USA to countries, such as China, India, Russia, and the Philippines (Hemphill, 2004,
  5. 5. as cited by Frauenheim, 2002). The remaining capital is spread more thinly amongworkers, while the foreign workers…become more productive and are better paid.” Theresult is weakened communities, less investment in tools and technologies that enablecurrent (domestic) workers to improve their productivity. Something that is overlooked isthat legal systems overseas differ in each country and enforcing intellectual propertyrights, such as patents, copyrights, trademarks, and trade secrets, is both expensive andtime consuming (Hemphill, 2004). Furthermore, in many cases outsourcing leads toconditions, such as poor environmental standard or employee workplace standards thatwould be viewed as unethical or illegal in the organizations true community. This isclearly a lose-lose proposition when viewed in this light. It is apparent that Friedman fails to realize that just because the laws of the landpermit the use of cheaper sources of labor, these types of actions are not ethical. Thereare numerous companies that have seen past the “quick, short-term” solution ofoutsourcing. Harley-Davidson chooses not to outsource; yet the company hasconsistently enjoyed record earnings without having to outsource its labor. In 1995, thecompany formalized its “unique Partner relationship with its unionized workforce”( In 2000, the stock split for the fifth time since 1986.Harley’s brochure notes that “Building the world’s best motorcycles is possible onlybecause so many Harley-Davidson employees are both enthusiasts and customers. Theirpassion for our products creates the ideal working environment, where employees careabout what they design, build and sell.” Outsourcing labor to an overseas location wouldmean that Harley-Davidson would lose their employees’ passion, loyalty, and care thatresults in the quality motorcycles the company is known for. H-D established the Harley-
  6. 6. Davidson Foundation, which supports the communities in which the company hasfacilities with funding and employee volunteerism. The Foundation reaches out to buildhealthy, thriving communities by placing an emphasis on Education, CommunityRevitalization, Arts & Culture, Health and the Environment. The Harley-DavidsonFoundation targets areas of greatest need among under-served populations to enhance thequality of life in our communities. The Foundation also supports selected national causes,including Veterans initiatives. “The late Roberto C. Goizueta, CEO of Coca-ColaCompany, argues that ‘businesses have an obligation to give something back to thecommunities that support them’ (Carroll, 1998).” Friedman’s theory is concerned with lowering overall costs to corporationswithout giving thought to the impact to the local community or the consumers who focuson ethical concerns. Outsourcing must be balanced through the lens of CSR. Toys R Usworked with the World Federation of the Sporting Goods industry, and received “thePioneer Awards in Global Ethics for their work in addressing the issue of child labor andfair labor practices around the world.” Even if the decision is made to outsource, anorganization still has responsibilities to the community in which it operates. Cooper, et. al.: “Given that labor accounts for about two-thirds of the cost ofmaking and selling products, greater labor productivity in today’s global economy istantamount to corporate survival.” Outsourcing alone cannot increase productivity.Organizations must also invest in the tools, technology, and people that are needed toimprove productivity. Basically, the relationship between companies and stakeholdersplay a crucial role in the economic and competitive strength of a company.
  7. 7. Good community relations are crucial for a company’s reputation, which in turn isvital for the company’s access to financial resources, government permits, and highlyqualified and motivated employees. However, corporate image is an area whereFriedman has overlooked. Per Henderson: “…profits depend on reputation, which in turndepends increasingly on being sent to act in a socially responsible way.” As noted in thecurrent political campaign rhetoric, outsourcing is often viewed negatively, which canquickly weaken an organization’s reputation. In addition, what firm would want to beassociated and criticized on the front page of a newspaper for using sweatshop labor?Companies that have invested heavily in offshore markets will see projected profitsdisappear if they have not fully examined issues around scaling, as well as, futureopportunities for labor arbitrage, developing leaders and retaining workers (Purdum andTeresko, 2004). Does Friedman not realize the effect that similar actions had on productssuch as Kathy Lee Gifford’s clothing line? It is also important to realize that choosing thewrong partner to outsource work can result in markets flooded with counterfeit products,technology trade secrets may be exposed, and the firm may lose control of a corporatebrand (Hemphill, 2004, as cited by Anderson, n.d.). Society is no longer a passive actor in relationship to business. Stakeholder andspecial interest groups are increasingly well organized, and becoming more vocal andencompassing in the demands they make on businesses. Friedman does not take intoconsideration what the community may do in retaliation when labor is outsourced. Someof the actions that may occur are picketing, labor strikes with existing domestic labor,negative publicity, product boycotting, lawsuits. A human resource consultant who is notanti-offshoring stated that “offshoring—and even domestic outsourcing—ultimately
  8. 8. reflects management’s commitment to business excellence. Work hard to improve theefficiency of the process and to instill motivation in your people, and you may find thatoffshoring is not only unnecessary, but also undesirable.” (Purdum and Teresko, 2004).Economist David Ricardo’s doctrine of comparative advantage states that, even if acountry is a high-cost producer of most things, it can still enjoy an advantage, since it willproduce some goods at lower relative cost than its trading partners (Roberts, 2004). Acountry’s labor, capital, and technology should not be outsourced in order forcomparative advantage to work. If the working class of America expects to maintain itssocial-economic position, then more companies must divest themselves of the notion tooutsource, embrace the four elements of being a good corporate citizen and establishequally stringent labor and environmental regulations to level globalize economy.This is another reason why there has been a proliferation of business sponsored CorporateSocial Responsibility (CSR) initiatives. Whether it is done for a moral or a selfish reasonthe underlying incentive for CSR is good for profits and long-term success.
  9. 9. ReferencesFriedman, M. (1970, September 13). The social responsibility of business is to increaseprofits. The New York Times Magazine, Retrieved October 16, 2004, from University ofMaryland University College, WebTycho.Hemphill, T.A. (2004). Global outsourcing: effective functional strategy or deficientcorporate governance? Corporate Governance, 4(4). Retrieved October 20, 2004, fromLexisNexis Academic database.Pfannenstein, L.L., & Tsai, R.J. (2004, Fall). Offshore outsourcing: Current and futureeffects on American industry. Information Systems Management, 21(4). RetrievedOctober 24, 2004, from ABI/INFORM Global database.Purdum, T., & Teresko, J. (2004, October). Smart outsourcing. Industry WeekI/W,253(10). Retrieved October 18, 2004m from Business Source Premier database (AN14660964).Roberts, P.C. (2004, March 22). The harsh truth about outsourcing. Business Week, 3875.Retrieved October 16, 2004, from Business Source Premier database (AN 12512568).Wilcke, R. W. (2004, Fall). An appropriate ethical model for business and a critique ofMilton Friedman’s thesis. The Independent Review, 9(2). Retrieved October 24, 2004,from Academic Search Premier database.