There is a long-standing debate over the goals of corporations. Should they focus mostly or exclusively on earning profits? Should they be willing to take on broader social missions? Should they be required to do so? What follows are some notes and snippets on this controversy, from various angles.
At least among economists, the usual starting point for these discussions is an essay written by Milton Friedman in the New York Times on September 13, 1970, called \”A Friedman doctrine — The Social Responsibility of Business is to Raise its Profits.\” As with many things written by Friedman, it is a starting point both for those who agree and who disagree, because of the clarity and pungency with which his views are expressed. The essay can be tracked down through the NYT archives and at various places on the web (like here).
Friedman makes the point that most people who run companies don\’t own the company; instead, they are managing the firm on behalf of someone else. Here\’s a snippet:
In a free-enterprise, private-property system, a corporate executive is an employe of the owners of the business. He has a direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. …
What does it mean to say that the corporate executive has a \”social responsibility\” in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire the \”hard-core\” unemployed instead of better-qualified available workmen to contribute to the social objective of reducing poverty …
Insofar as his actions in accord with his \”social responsibility\” reduce returns to shareholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers\’ money. Insofar as his actions lower the wages of some of his employes, he is spending their money.
Friedman has no objection, as he states later in the essay, if the owner of a business wants to act in accordance with an idea of social responsibility. He recognizes that certain kinds of social expenditures can raise corporate profits–but points out that in such cases, calling for profit-maximization works just as well. Friedman is of course supporting the idea that corporations follow both legal obligations, and also ethical obligations. He is pointing out that if social responsibility has additional costs, someone pays for those costs.
A point Friedman does not state explicitly in this essay, but is implicit to many economists, is that the \”social value\” of a corporation lies partly in the way that it uses know-how and work to organize and combine various resources–workers, physical capital, and knowledge that can range from breakfast recipes to pharmaceutical formulas. By acting in this way, a corporation provides a service that customers believe is worth their money and jobs that workers believe are worth accepting, as well as buying inputs and supplies from other businesses and thus supporting them as well. If a company consistently makes losses and does not earn profits, these benefits will be lost. On the other side, a company that earns profits then has access to finance that could be used to expand in a way that satisfies more customer and hires more workers.
It seems to me that many discussions of the \”social responsibility\” of firms do not pay sufficient attention to these gains from pleasing customers and paying workers and suppliers. Such gains should not be taken for granted.
The Chicago Booth Review offers an interesting discussion on Friedman\’s essay and these topics in
\”Should public companies do more than maximize profits? BlackRock cofounder Sue Wagner joins Chicago Booth’s Marianne Bertrand, Robert H. Gertner, and Luigi Zingales to discuss the business of business\” (August 28, 2018). Luigi Zingales argues:
\”Friedman recognizes that most people, when they invest, look not only at their financial returns but at other dimensions of their investment. However, he also makes an assumption that social activity and business activity are completely separable.
That assumption holds true in the case of donations. If you want to donate a lot of money to your alma mater, you can do it directly through the corporation, or you can distribute the money to shareholders and let the shareholders decide if and how they want to donate it. There is no value destroyed by the donation being made at the shareholder level, and because there is more flexibility in that route—and because I have a different alma mater than many of my fellow shareholders, and we all have different ideas about where our money should go—it is better to push that decision down to the shareholder level rather than doing it at the corporate level. So, if the only social activity we were talking about were corporate donations, Friedman’s principle would be absolutely correct.
However, for most social activities, there are some synergies to decision-making at the corporate level. For example, let’s say I really care about the environment, and I am willing to sacrifice some of my profits to have better management of oil spills. … It costs much more to manage oil spills at the shareholder level than at the corporate level. So maximizing shareholder value and maximizing shareholder welfare are not the same thing. People care about more than just money, and there are things for the sake of which people are willing to forgo some money. …
There are plenty of funds that abstain from investing in certain stocks for reasons unrelated to financial return. Environmentally friendly funds, for instance, don’t invest in oil companies. But while investing in a fund like that might save your soul, it doesn’t save the planet. If everyone who cares about the environment doesn’t invest in a particular company, it will be controlled entirely by people who don’t care about the environment, and they’ll run the company in the most environmentally unfriendly way. If you care about the environment, why not create an environmentally friendly index fund that includes oil companies, and then go to shareholder’s meetings and vote for board members who care about the environment too?
Although Zingales is a strong advocate of giving shareholders a bigger voice to express a broader range of corporate goals, he is also suitably pessimistic about how much this might actually end up accomplishing. An accompanying article in the Chicago Booth Review talks about \”impact investors\” and the \”double bottom line\” strategy when a company sets explicit goals both for profits and also for other objectives, like level of carbon emitted.
Also, it\’s worth remembering that the ultimate decisions about how corporations should pursue social responsibility will be made by corporate executives, who are not a representative group and are not accountable to a democratic process. Marianne Bertrand says:
The main thing that Friedman is worried about is that we would not want to be in an environment where the CEOs of companies, just because they happen to be the CEOs, are deciding for us as a society, as an electorate, which social objectives we care about and which we don’t. We hope that we have a political process in place where the preferences of the electorate about spending on schools or spending on alleviating homelessness would be expressed through the political system, but I think there is a concern that without some guidance as to what social goals companies should be pursuing, especially when those social goals are no longer fully aligned with long-term valuation, we might give corporations too much power.
Or as Zingales adds:
On the one hand, I recognize the gigantic failure of the political system, and so I would like corporations to do more. On the other hand, it’s a risky business because corporations, as Sue was saying, don’t represent all the people. They represent a subset of people. So, if we give them a huge amount of political power, I’m not so sure that they’ll fix the problems the right way.
Here\’s a random assortment of some other thoughts about corporations and social value that have been piling up in my files.
The growth of the liberal market, I would argue, promotes virtue, not vice. Most of the clerisy—themselves, as Bismarck described them with disdain, having “no property, no trade, no industry”—think the opposite: that it erodes virtue. And yet we all take happily what the market gives—polite, accommodating, energetic, enterprising, risk-taking, trustworthy people with property, trade, and industry; not bad people. Sir William Temple attributed the honesty of Dutch merchants in the seventeenth century “not so much [to] . . . a principle of conscience or morality, as from a custom or habit introduced by the necessity of trade among them, which depends as much upon common-honesty, as war does upon discipline.” In the Bulgaria of socialism, the department stores had a policeman on every floor—not to prevent theft but to stop the customers from attacking the arrogant and incompetent staff charged with selling shoddy goods that fell apart instantly. The way a salesperson in an American store greets customers makes the point: “How can I help you?” The phrase startles some foreigners. It is an instance in miniature of the bourgeois virtues.
Some years ago, Edmund Phelps suggested that one can make a strong case for capitalism because it has proven to be a better at providing \”creative workplaces\” than other approaches (from “Interview with Edmund S. Phelps,” by Howard R. Vane and Chris Mulhearn, Journal of Economic Perspectives, Summer 2009).
\”[I]f we’re going to have any possibility of intellectual development we’re going to have to have jobs offering stimulating and challenging opportunities for problem solving, discovery, exploration and so on. And capitalism, like it or not, has so far been an extraordinary engine for generating creative workplaces in which that sort of personal growth and personal development is possible; perhaps not for everybody but for an appreciable number of people, so if you think that it’s a human right to have that kind of a life, then you have on the face of it a justification for capitalism. There has to be something pretty powerful to overturn or override that.”
Bryan Caplan recently wrote a little love letter to business people at the EconLog website (\”Pro-Market AND Pro-Business,\” August 2, 2018):
Yes, businesspeople are flawed human beings. But they are the least-flawed major segment of society. If any such segment deserves our admiration, gratitude, and sympathy, it is businesspeople. …
My prima facie case begins with this basic fact: Businesses produce and deliver virtually all of the wonderful, affordable products that we enjoy. Contrary to millennia of economic illiterates, businesses rarely do so by “exploiting” their workers. Instead, businesses provide gentle but much-needed leadership. Left to our own economic devices, most of us are virtually useless; we don’t know how to produce much, and we don’t know how to find customers. Businesspeople solve these problems: They recruit workers, organize them to vastly raise their productivity, then put these products in the hands of customers all over the world. Yes, they’re largely in it for the money; but – unlike every government on Earth – business rarely puts a gun to your head. Businesses assemble teams of volunteers to meet the needs of willing consumers – and succeed wildly….
I love businesses because they treat me the way I like to be treated. When businesses want me to buy their products, they almost never nag, shame, preach, condescend, or troll. They make offers, politely say “If you have any questions, you can reach me here” – and then leave me in peace. I know business doesn’t love me, but it would be awkward if it did. What I seek is common decency – and that’s what business almost always offers. …
Many will think me naive, but there are few more disillusioned than I am. I don’t believe that good or truth wins out in the end. I don’t believe in the American system of government. I don’t believe in the wisdom of the American people. I don’t believe in religion. I don’t believe in the media. I certainly don’t believe in our education system. I believe in my immediate family, my closest friends, my own ideas. And business. It’s not perfect, but it’s still nothing short of a miracle.
I\’ll add one more observation. When a person lives their life among college students, as I do, it\’s pretty common to hear talented young adults say with considerable emphasis that they want to work for a non-profit. If the time seems right, I sometimes try to start a conversation about this emphasis. After all, both for-profits and non-profits face budget constraints. Both have reasons to hold down costs and act efficiently, although both may fail to do so. Both need sources of finance, and may need to tap banks or capital markets to get it.
The classic argument why some sectors may be non-profit is that for-profits may be tempted to sacrifice quality: for example, we might be suspicious of have privately owned prisons, because we fear that they will not meet a minimum standard of how to treat people. We might be suspicious of for-profit colleges or for-profit hospitals for related reasons. The concern is a fair one. But it\’s also worth remembering that markets often deliver certain kinds of quality quite well, from food in a supermarket to a smartphone. And some nonprofits may lack incentives to raise their game and improve quality of output, while providing highly paid jobs to some top executives.
For those concerned with protecting the environment, or providing food and housing to the poor, or other social responsibility goals, there is always a choice about working within the market system or outside it. One of my friends who has a strong interest in recent immigrants helped created a market for them to sell their handicrafts through a string of stores in several cities. Another one of my strong environmentalist friends worked for giant real estate developers as a hydro-geologist, trying to make sure that such projects would do as little to damage the water table as possible–or maybe even do some good. When it comes to the for-profit/non-profit distinction, and the issues of how to contribute to the many goals embodied in the label of \”social responsibility,\” it seems important to me to dig deeper than quick-twitch reactions of approval and disapproval.