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Social Responsibility + Profits - Friedman

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Social Responsibility + Profits - Friedman

  1. 1. “ THE SOCIAL RESPONSIBILITY OF BUSINESS IS TO INCREASE ITS PROFITS” – MILTON FRIEDMAN, 1970 – A CRITICAL ANALYSIS <ul><li>by </li></ul><ul><li>Cheryl Mayers-Goddard </li></ul><ul><li>Claire Sargeant </li></ul><ul><li>Lisa Haynes </li></ul><ul><li>Group 3 of the Durham Caribbean MBA </li></ul>
  2. 2. CONTEXT OF STATEMENT <ul><li>THE STATEMENT: </li></ul><ul><li>“ The social responsibility of a business is to increase its profits.” (Friedman) </li></ul><ul><li>THE CONTEXT: </li></ul><ul><li>Who When Where Why </li></ul>
  3. 3. Social Responsibility + Profit <ul><li>Definition of Social Responsibility as it relates to Profit </li></ul><ul><ul><li>Taking into account “the interests and concerns of a community rather than just its shareholders” (Sloman et al, 2010); </li></ul></ul><ul><ul><li>“ a business’ obligation, beyond that required by law and economics, to pursue long-term goals that are good for society” (Robbins et al, 2005); </li></ul></ul><ul><li>2 views of the Responsibilties of Corporations in a Social Context: </li></ul><ul><ul><li>Classical : A company is committed solely to increasing the wealth of its shareholders </li></ul></ul><ul><ul><li>Socioeconomic : a company must also consider others and society into its allocation of resources </li></ul></ul><ul><ul><ul><li>Reindhartd et al (2008) queried whether firms: </li></ul></ul></ul><ul><ul><ul><ul><li>Can do this within their scope as laid out by shareholders </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Have the wherewithal to sustain such an activity over time </li></ul></ul></ul></ul>
  4. 4. Friedman’s Hypothesis <ul><li>Supporting arguments used by Friedman: </li></ul><ul><li>“ A corporation is an artificial person and therefore cannot be socially responsible.” </li></ul><ul><li>“ Social responsibility concerns the proprietors and corporate executives.” </li></ul><ul><li>“ If social responsibility is exercised it is acting against the shareholders, owners of the business.” </li></ul>
  5. 5. Our Position <ul><li>A business should engage in socially responsible projects but under certain conditions: </li></ul><ul><li>Criteria: </li></ul><ul><ul><li>Create Future benefit to the business – direct or indirect </li></ul></ul><ul><ul><li>Advance the corporation’s goals </li></ul></ul><ul><ul><li>Be justifiable to shareholders </li></ul></ul>VIEW: A business has a responsibility to increase its profits and to be socially responsible towards its external environment. Adopting a synergistic approach vs. a singular approach, will benefit both the stakeholders and the corporation.
  6. 6. Pros & Cons of Friedman’s Statement <ul><li>Points of Disagreement : </li></ul><ul><ul><li>Lost opportunities to build equity and goodwill </li></ul></ul><ul><ul><li>Hurt corporate image in public’s eye </li></ul></ul><ul><ul><li>Exclude entire segment of socially conscious investors </li></ul></ul><ul><ul><li>Good corporate citizens perform equally well in market. </li></ul></ul><ul><ul><li>Business are interdependent on elements in its ecosystem. </li></ul></ul><ul><ul><li>Sound business sense not to alienate stakeholders. </li></ul></ul><ul><ul><li>Creates cognitive problems/ conflict within managers’ personal value system (agency problem) </li></ul></ul><ul><li>Points of Agreement: </li></ul><ul><ul><li>Reduced profits in short run </li></ul></ul><ul><ul><li>Possibility of discord with shareholders </li></ul></ul><ul><ul><li>Increased cost of products </li></ul></ul>
  7. 7. ECOSYSTEM IN WHICH A BUSINESS EXISTS <ul><li>A business does not exist in isolation: </li></ul>“ The organisation cannot operate in isolation from the environment of which it is a part...The economic efficiency of organisations is affected by governmental, social, technical and cultural variables. Organisations make a contribution to the quality of life and to the well-being of the community” (Mullins, 2005) The Environment Moral + Ethical Financial Social & Governmental THE CORPORATION
  8. 8. Examples <ul><li>Examples of companies and scenarios where Friedman’s recommendations were practiced (pure capitalism, free enterprise, free market system) and failed </li></ul><ul><ul><li>Enron, US Housing Market Crash, US Banking System, Stanford Financial Group, Bernard Madoff – Ponzi Scheme </li></ul></ul><ul><li>Examples of companies where a balanced synergy of </li></ul><ul><li>profit seeking and social responsibility are being </li></ul><ul><li>achieved successfully </li></ul><ul><ul><li>Starbucks , IBM, Google, Nike, Gap Inc ., Hallmark, Dell </li></ul></ul>
  9. 9. A Synergistic Approach (cont’d) <ul><li>FINANCIAL – </li></ul><ul><li>Synergistic Approach is Optimal </li></ul><ul><li>Supernormal Profits (Friedman’s Model is unsustainable) </li></ul><ul><ul><li>Unsustainable in long run, can negatively impact bottom line </li></ul></ul><ul><ul><li>Unsustainable and result in a loss in long run </li></ul></ul><ul><ul><ul><li>Law of Diminishing Returns </li></ul></ul></ul><ul><ul><ul><li>Returns to Scale </li></ul></ul></ul><ul><ul><ul><li>Financial Loss </li></ul></ul></ul>
  10. 10. A Synergistic Approach (cont’d) 2007 – 2010 Financial Donations: Employee Participation 2008 - 2010 Financial donations and volunteerism: Total employee contribution Financial Year 2010 2009 2008 2007 Dividends paid per share: $0.40 $0.34 $0.34 $0.32 Earnings per share : $1.88 $1.58 $1.34 1.05
  11. 11. A Synergistic Approach (cont’d) <ul><li>SOCIAL & GOVERNMENTAL – (e.g: communities, workers, labour unions, trade unions) </li></ul><ul><li>Social Partnership: Two entities need each other to survive. </li></ul><ul><ul><li>Businesses help share the social burden with government </li></ul></ul><ul><ul><li>Government/Society Benefits from Businesses: </li></ul></ul><ul><ul><li>Societal: Opportunities for Social Advancement with Incomes Earned, Educate staff, Solve unemployment concerns, Pay health care costs for workers, cheaper products for consumer – pass savings on to consumer </li></ul></ul><ul><ul><li>Governmental: Help stimulate economy by expansion of operations, job Creation with tax savings vs. pocket all the profit, add capital in joint venture projects – affordable housing, charitable donations to meet needs in society, ‘Creative Capital’ ( Bill Gates, Microsoft) </li></ul></ul><ul><li>Business Benefits from Government: </li></ul><ul><li>Financial/Regulatory Assistance: Tax concessions, Tax exemptions, Trade protection, Subsidies, Provision of statutory and regulatory bodies </li></ul>
  12. 12. A Synergistic Approach (cont’d) <ul><li>MORAL & ETHICAL – (e.g suppliers, workers, communities) </li></ul><ul><li>Utilitarian Ethics (Mill) </li></ul><ul><ul><ul><li>greatest good for greatest number of people </li></ul></ul></ul><ul><li>Virtue Ethics (Plato) </li></ul><ul><ul><ul><li>do what is morally advisable </li></ul></ul></ul><ul><li>Universal Maxims/Natural Universal Laws & Principles </li></ul><ul><ul><ul><li>Balance + Equilibrium </li></ul></ul></ul><ul><ul><ul><li>Reciprocity </li></ul></ul></ul><ul><ul><ul><li>Homeostasis </li></ul></ul></ul>

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