Sunday, April 6, 2008

Notes on Corporate Social Responsibility: Milton Friedman

Notes on Friedman’s Article

Thesis: The only responsibility of businesses is to increase its profits, without fraud or deception. (close paraphrase)

The Agency Argument: When performing her role as an executive, a businessperson is an employee of the owners of the business where she works (e.g., stockholders). Therefore, as an employee - as their agent - she is obligated to run the business in accordance with the express wishes of these business owners, for they are her employers. Now the owners’ general wish is for the business to make as much money as possible (within legal limits). Therefore, the executive is obligated to run the business in such a way that it makes as much money as possible. But if she tries to practice social responsibility as a business person, then she is acting against the interests of the business owners. For practicing such corporate social responsibility will not result in the business making as much money as possible. Therefore, if she practices corporate social responsibility, she will violate her obligation to the business owners, and would therefore be acting wrongly.

The Taxation Argument (also known as the “In Principle” Argument): If a corporate executive practices broad social responsibility, then this is tantamount to forcing the business owners to contribute to the common good against their will (by spending their investments on public causes without their consent). For all intents and purposes, the corporate executive has illegitimately taken on a function reserved solely for governmental institutions (where the members of the government are publicly elected to represent their interests when they spend some of their money): in effect, he’s engaging in taxation without representation. Historically, Americans have seen this as immoral (remember the Boston Tea Party?). Therefore, executives shouldn’t practice broad social responsibility.

The Effectiveness Argument (also known as the “In Consequences” Argument): Corporate executives aren’t trained to do the difficult work of broad social responsibility. But if not, then if they try to do it, then they make things worse, not better. As Friedman says of a hypothetical, conscientious CEO who wants to practice broad social responsibility by trying to fight inflation:

“How is he to know what action of his will contribute to that end? He is presumably an expert in running his company - in producing a product or selling it or financing it. But nothing about his selection makes him an expert on inflation. Will his holding down the price of his product reduce inflationary pressure? Or, by leaving more spending power in the hands of his customers, simply divert it elsewhere? Or, by forcing him to produce less because of the lower price, will it simply contribute to shortages?” (P. 10)

The “Undermines Freedom” Argument:

-When influential businesspeople give speeches of the need for corporate social responsibility, it re-enforces the popular belief that pursuit of profit is morally wrong, and needs to be curbed by government control. But once the government gets involved, these businessmen, and all involved in the market, will have to conform to the dictates of bureaucrats.

-The free market system is founded upon the right to private property ownership. This allows individuals to be free of external control and coercion by others – no one can manipulate a private property owner by threatening to kick them off of their property and take it away from them if they don’t do as they say, for they own the property!1 This, in turn, means that if individuals are to cooperate to receive a benefit, such cooperation is always and only voluntarily and freely entered into and sustained. One can enter and leave such a group activity whenever they please. No one can force another to conform to their will. But if the government is allowed to control the market by forcing businesses to practice social responsibility, they are, in effect, undermining the freedom derived from the right to private property ownership, and forced to conform to their dictates.

Objection #1: “The problems are too urgent to leave to the slow political process. The effect of CEOs practicing Broad Social Responsibility (BSR) is much quicker. Therefore, they should practice BSR.”

Reply: This is saying, in effect, that the advocates of this idea have failed to persuade the majority of their cause by means of the democratic political process, and now they want to override democracy and impose their views on the majority. This is obviously unethical.

Objection #2: “But it’s just good business to practice BSR. For example, “donat[ing] resources to providing amenities to [a host community of a business], or improving its government.”“2 This will attract desirable employees, lesson losses from pilferage, etc.3 But if so, then it’s in the interests of the business to practice BSR.”

Reply 1: Yes, but then such practices are justified on grounds of self-interest, and not on grounds of the supposed need to practice BSR.

Reply 2: If a CEO understands the truth of reply 1, and yet still portrays themself to the public as doing these things out of a motive to practice BSR, then they are acting like hypocrites, and are “approaching fraud”4.