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Milton Friedmans views[1]


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Milton Friedmans views[1]

  1. 1. Milton Friedman famously wrote an article entitled, “The social responsibility of business is to increase its profits.” Critically examine this statement.<br />Albert St. John<br />Donna Hope<br />Michelle Lawrence<br />Roger Bryan<br />Stacey Johnson<br />1<br />
  2. 2. Corporate Social Responsibility<br />The World Business Council for Sustainable Development in its publication "Making Good Business Sense" by Lord Holme and Richard Watts, used the following definition."Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large"<br />2<br />
  3. 3. The social responsibility of business is to increase its profit<br />A corporation is an artificial person<br />Executives are employed by business owners<br />Conflict of interest (business owners and executives)<br />Governmental bodies are instituted to cover social responsibilities<br />CSR can result in companies going out of business <br />Executives who spend money on social responsibility are irresponsible<br />Milton Friedman’s Views<br />3<br />
  4. 4. If social responsibility is undertaken it must be mutually beneficial<br />Individual business can be socially responsible<br />Corporations are hypocrites<br />Alternative to CSR is a system based on private property and free markets<br />Milton Friedman’s Views<br />4<br />
  5. 5. Legal Framework<br />The Business Judgement Rule grants leeway to executives to commit corporate resources to projects benefitting the public as long as managers claim some plausible connection to future profits – Eg, case of Occidental Petroleum <br />5<br />
  6. 6. Alternative ViewKay<br />The values of business are typically similar to those of human activities eg. Richer Sounds<br />Selfish business rarely succeed eg. Cypress Semiconductor<br />Many benefits to companies practising CSR <br />Successful businesses are driven by people <br />Principle of obliquity – where some objectives are best pursued indirectly <br />6<br />
  7. 7. CSR argument remains relevant<br />CSR is considered “the intelligent operation of business”<br />Businesses are successful with multi-dimensional approach<br />Corporations have recognized the importance of CSR and practice same<br />Conclusion<br />7<br />
  8. 8. A corporation’s primary purpose is to maximise profitability and as a result sustain its viability. A corporation is not a person and therefore cannot have responsibilities. Social responsibility is a mandate for individuals and not businesses. <br />The corporate executives are employed and mandated to represent the business owners interests, which is usually to make and increase profit. Friedman argues that conflicts of interest may arise, “Who is the executive obligated to, the shareholders or his social conscience?” He believes that if the company devotes any significant fraction of its resources to exercising a social responsibility unrelated to the bottom line, it would cease to be a going concern or be taken over. A firm may participate in CSR reducing profit on a one off basis, but cannot sustain this level of profit reduction as this results in smaller dividend payments to shareholders, stock price may decline until return on equity is increased, reduced wages for employees corporate takeover or closure.<br />8<br />
  9. 9. Maximizing profits is an end from the private point of view; it is a means from the social point of view. If they don’t and spend money on corporate social responsibility they are not acting as an agent of stockholders, customers or employees but as a public employee. Friedman suggests that engaging in socially responsible activities is the equivalent of levying taxes on constituencies (employees, customers, investors, vendors, and communities) and therefore social responsibility is not the role of the company but that of government. Executives making decisions in regards to social responsibility will often act outside of their core competencies. AneelKarnani (2010) believed that social projects that are required to be done, unless profitable will not be executed even though it is in the best interest of society.<br />9<br />
  10. 10. CSR may be undertaken if the business is to benefit – Eg. Tax write offs via charitable donations or investing in educating a community as the business will reap . The practice of setting up a charitable foundation makes sense only because of the obscene tax laws which allow an individual shareholder gain more if the company donates to a charity on his behalf than if he does it himself. Sole proprietors can exercise their right to be socially responsible to any extent as they spend their own money. Corporations who are “socially responsible” are hypocrites, as this is just a cover for their own selfish means to increase the bottom line, this is only practiced for their own benefits. Any significant fraction of a corporations resources used in social responsibility unrelated to the bottom-line, would have led to take-overs or them going out of business (Friedman’s response to John Mackey, 2005). The doctrine of social responsibility is frequently used as a cloak for actions that are justified on other grounds rather than as a reason for such actions. A system based on private property and free markets is a sophisticated means of enabling people to cooperate in their economic activities without compulsion. It enables separated knowledge to assure that each resource is used for its most valued use, and is combined with other resources in the most efficient way. <br />10<br />
  11. 11. Kay Opposes Friedman<br />Businesses are generally an integral part of the community in which they operate and cannot completely separate themselves from the values and upkeep of those communities. Richer Sounds, a British hi-fi retailer has delivered success over the years with an owner who focused on people, thus creating a highly committed and motivated workforce. Business which is selfish in motivation, narrow in outlook and instrumental in behaviour is rarely successful. Cypress Semiconductor, an integrated circuit company was driven by profitability and in 2005 lost more money for its investors than it made. Good and successful businesses are multidimensional entities that are characterized by satisfied customers, motivated employees, well rewarded investors and high reputations within their communities (e.g. Sony, Shell, Marks & Spencer, Disney Corp etc..). Whole Foods and Google are very successful companies that actively practise social responsibility. These values allow them to attract and retain the best talent, interact positively and influence changes in the society in which they operate. <br />11<br />
  12. 12. The success of the business is driven not generally by profit alone but by the commitment and devotion to excellence of key staff (Alasdair McIntyre vs Al Dunlap). McIntyre believed that commitment to the team and team spirit delivered excellent results whereas Dunlap (Chainsaw Al) focused on profit at the exclusion of everything else. Being in the McIntyre crew gives the benefit of no conflict between the values in private life and the values of the business or the values of the society. Commitment and devotion across a team is generally achieved through an overall package offered by the Company including many factors other than monetary reward. Businesses that have success over the long term are driven by a set of values that encompass the communities in which they operate and takes into account the complexities of the society and individuals in those societies.<br />12<br />
  13. 13. Kay’s View Con’t<br />Kay’s research indicates that exceptionally successful companies were particularly profitable but not particularly profit oriented. Also recent studies assessed eighteen paired comparisons of successful and less successful companies in the same industry. Their judgment did not find “maximising shareholder wealth” or “profit maximisation as the dominant driving force or primary objective”. The study revealed that profit was 18% higher for companies with ethical codes. These visionary companies were generally more ideologically driven and less purely profit driven.<br />13<br />
  14. 14. Merck and Microsoft as examples were driven by ,<br />Merck – “we try never to forget that medicine is for the people. It is not for profits. The profits will follow…<br />Microsoft – Gates was interested in computers and enthused by what businesses he could set up. He became the richest man in America.<br />Apple – Steve Jobs focused on delivering superior customer products and services and Apple remains one of the most successful companies in the world.<br />14<br />
  15. 15. Conclusion<br />It is quite interesting to note that forty years after Milton Friedman’s article was published, the argument remains robust and is still relevant. It is evident that if social responsibility is aligned with the current or future profitability of a business then it is best described as “the intelligent operation of the business”. Businesses are successful based on a multi-dimensional approach to the well-being of their various constituencies (employees, shareholders, customers, suppliers, vendors and the community). Projects that are valuable to society but make no economic sense to the company will be ignored under Friedman. The opposing view, would be companies that are run by policies aligned with human values such as mutual care, love, respect for others and the environment would undertake such projects regardless of gain to the company. Of course, there needs to be a balance in the amount of contribution made so that the viability of the company is ensured. The principle of obliquity is pertinent to the focus of successful businesses. Typically success is achieved by pursuing a philosophy of delivering excellent customer service and products rather than a myopic focus on profitability. <br />15<br />
  16. 16. Most companies now recognize the importance of corporate social responsibility, to derive a competitive advantage, to be better perceived by society, to protect the long term viability of the company and to improve the communities in which they operate.<br />Conclusion Cont’d<br />16<br />
  17. 17. Holme, L. and Watts, R., Making Good Business Sense, available from:<br /><br /><br />Sloman, J, Hinde, K and Garratt, D 2010, Economics for Business, 5th Edition, FT Prentice Hall, Pearson Education<br /><br /><br /><br /><br />Bibliography<br />17<br />