“THE SOCIAL RESPONSIBILITY OF BUSINESS IS TO INCREASE ITS PROFITS” – MILTON FRIEDMAN, 1970 – A CRITICAL ANALYSISby•Cheryl Mayers-Goddard

• Claire Sargeant

•Lisa Haynes

Group 3 of the Durham Caribbean MBA

CONTEXT OF STATEMENT

THE STATEMENT: “The social responsibility of a business is

to increase its profits.” (Friedman)

THE CONTEXT: Who When Where Why

Social Responsibility + Profit

Definition of Social Responsibility as it relates to Profit Taking into account “the interests and concerns of a community

rather than just its shareholders” (Sloman et al, 2010); “a business’ obligation, beyond that required by law and

economics, to pursue long-term goals that are good for society” (Robbins et al, 2005);

2 views of the Responsibilties of Corporations in a Social Context: Classical: A company is committed solely to increasing the

wealth of its shareholders Socioeconomic: a company must also consider others and

society into its allocation of resources Reindhartd et al (2008) queried whether firms:

Can do this within their scope as laid out by shareholders Have the wherewithal to sustain such an activity over time

Friedman’s Hypothesis

Supporting arguments used by Friedman: “A corporation is an artificial person and

therefore cannot be socially responsible.” “Social responsibility concerns the

proprietors and corporate executives.” “If social responsibility is exercised it is

acting against the shareholders, owners of the business.”

Our Position

A business should engage in socially responsible projects but under certain conditions:

Criteria: Create Future benefit to the business – direct or indirect Advance the corporation’s goals Be justifiable to shareholders

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.

Pros & Cons of Friedman’s Statement

Points of Disagreement: Lost opportunities to build

equity and goodwill Hurt corporate image in

public’s eye Exclude entire segment of

socially conscious investors

Good corporate citizens perform equally well in market.

Business are interdependent on elements in its ecosystem.

Sound business sense not to alienate stakeholders.

Creates cognitive problems/ conflict within managers’ personal value system (agency problem)

Points of Agreement: Reduced profits in short run Possibility of discord with

shareholders Increased cost of products

ECOSYSTEM IN WHICH A BUSINESS EXISTS

A business does not exist in isolation:

The Environment Moral + Ethical

Financial Social & Governmental

THE CORPORATION

“The organisation cannot operate inisolation from theenvironment of whichit is a part...Theeconomic efficiency oforganisations isaffected bygovernmental, social,technical and culturalvariables. Organisations make a contributionto the quality of lifeand to the well-beingof the community” (Mullins, 2005)

Examples

Examples of companies and scenarios where Friedman’s recommendations were practiced (pure capitalism, free enterprise, free market system) and failed

Enron, US Housing Market Crash, US Banking System, Stanford Financial Group, Bernard Madoff – Ponzi Scheme

Examples of companies where a balanced synergy of

profit seeking and social responsibility are being

achieved successfully

Starbucks, IBM, Google, Nike, Gap Inc., Hallmark, Dell

A Synergistic Approach (cont’d)

FINANCIAL – Synergistic Approach is Optimal

Supernormal Profits (Friedman’s Model is unsustainable) Unsustainable in long run, can negatively

impact bottom line Unsustainable and result in a loss in long run

Law of Diminishing Returns Returns to Scale Financial Loss

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 $0.32Earnings per share: $1.88 $1.58 $1.34 1.05

A Synergistic Approach (cont’d)

SOCIAL & GOVERNMENTAL – (e.g: communities, workers, labour unions,

trade unions)

Social Partnership: Two entities need each other to survive.

Businesses help share the social burden with government

Government/Society Benefits from Businesses:

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

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)

Business Benefits from Government:

Financial/Regulatory Assistance: Tax concessions, Tax exemptions, Trade protection, Subsidies, Provision of statutory and regulatory bodies

A Synergistic Approach (cont’d)

MORAL & ETHICAL – (e.g suppliers, workers, communities)

Utilitarian Ethics (Mill) greatest good for greatest number of people

Virtue Ethics (Plato) do what is morally advisable

Universal Maxims/Natural Universal Laws & Principles

Balance + Equilibrium Reciprocity Homeostasis