Rethinking the Social Responsibility of Business

A Reason debate featuring Milton Friedman, Whole Foods' John Mackey, and Cypress Semiconductor's T.J. Rodgers.

Thirty-five years ago, Milton Friedman wrote a famous article for The New York Times Magazine whose title aptly summed up its main point: "The Social Responsibility of Business Is to Increase Its Profits." The future Nobel laureate in economics had no patience for capitalists who claimed that "business is not concerned 'merely' with profit but also with promoting desirable 'social' ends; that business has a 'social conscience' and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers."

Friedman, now a senior research fellow at the Hoover Institution and the Paul Snowden Russell Distinguished Service Professor Emeritus of Economics at the University of Chicago, wrote that such people are "preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades."

John Mackey, the founder and CEO of Whole Foods, is one businessman who disagrees with Friedman. A self-described ardent libertarian whose conversation is peppered with references to Ludwig von Mises and Abraham Maslow, Austrian economics and astrology, Mackey believes Friedman's view is too narrow a description of his and many other businesses' activities. As important, he argues that Friedman's take woefully undersells the humanitarian dimension of capitalism.

In the debate that follows, Mackey lays out his personal vision of the social responsibility of business. Friedman responds, as does T.J. Rodgers, the founder and CEO of Cypress Semiconductor and the chief spokesman of what might be called the tough love school of laissez faire. Dubbed "one of America's toughest bosses" by Fortune, Rodgers argues that corporations add far more to society by maximizing "long-term shareholder value" than they do by donating time and money to charity.

Reason offers this exchange as the starting point of a discussion that should be intensely important to all devotees of free minds and free markets. Comments should be sent to letters@reason.com.

Putting Customers Ahead of Investors
John Mackey

In 1970 Milton Friedman wrote that "there is one and only one social responsibility of business--to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." That's the orthodox view among free market economists: that the only social responsibility a law-abiding business has is to maximize profits for the shareholders.

I strongly disagree. I'm a businessman and a free market libertarian, but I believe that the enlightened corporation should try to create value for all of its constituencies. From an investor's perspective, the purpose of the business is to maximize profits. But that's not the purpose for other stakeholders--for customers, employees, suppliers, and the community. Each of those groups will define the purpose of the business in terms of its own needs and desires, and each perspective is valid and legitimate.

My argument should not be mistaken for a hostility to profit. I believe I know something about creating shareholder value. When I co-founded Whole Foods Market 27 years ago, we began with $45,000 in capital; we only had $250,000 in sales our first year. During the last 12 months we had sales of more than $4.6 billion, net profits of more than $160 million, and a market capitalization over $8 billion.

But we have not achieved our tremendous increase in shareholder value by making shareholder value the primary purpose of our business. In my marriage, my wife's happiness is an end in itself, not merely a means to my own happiness; love leads me to put my wife's happiness first, but in doing so I also make myself happier. Similarly, the most successful businesses put the customer first, ahead of the investors. In the profit-centered business, customer happiness is merely a means to an end: maximizing profits. In the customer-centered business, customer happiness is an end in itself, and will be pursued with greater interest, passion, and empathy than the profit-centered business is capable of.

Not that we're only concerned with customers. At Whole Foods, we measure our success by how much value we can create for all six of our most important stakeholders: customers, team members (employees), investors, vendors, communities, and the environment. Our philosophy is graphically represented in the opposite column.

There is, of course, no magical formula to calculate how much value each stakeholder should receive from the company. It is a dynamic process that evolves with the competitive marketplace. No stakeholder remains satisfied for long. It is the function of company leadership to develop solutions that continually work for the common good.

Many thinking people will readily accept my arguments that caring about customers and employees is good business. But they might draw the line at believing a company has any responsibility to its community and environment. To donate time and capital to philanthropy, they will argue, is to steal from the investors. After all, the corporation's assets legally belong to the investors, don't they? Management has a fiduciary responsibility to maximize shareholder value; therefore, any activities that don't maximize shareholder value are violations of this duty. If you feel altruism towards other people, you should exercise that altruism with your own money, not with the assets of a corporation that doesn't belong to you.

This position sounds reasonable. A company's assets do belong to the investors, and its management does have a duty to manage those assets responsibly. In my view, the argument is not wrong so much as it is too narrow.

First, there can be little doubt that a certain amount of corporate philanthropy is simply good business and works for the long-term benefit of the investors. For example: In addition to the many thousands of small donations each Whole Foods store makes each year, we also hold five 5% Days throughout the year. On those days, we donate 5 percent of a store's total sales to a nonprofit organization. While our stores select worthwhile organizations to support, they also tend to focus on groups that have large membership lists, which are contacted and encouraged to shop our store that day to support the organization. This usually brings hundreds of new or lapsed customers into our stores, many of whom then become regular shoppers. So a 5% Day not only allows us to support worthwhile causes, but is an excellent marketing strategy that has benefited Whole Foods investors immensely.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • John Schaffhausen||

    Being a former employee of Cypress Semiconductor for five of my 28 years in this industry, I can safely say that T.J Rodgers thinks nothing more than about his own personal gain "Period"! T.J. boasted about the amount of food donated to charity, although what he did not say was that the managers required their employees to contrbute to charities. As my former manager would tell me, "you are paid a lot of money to work here, so you must donate to our selected charities". This was not an option for the employees it was a requirement. The first time I handed my charity card back to my manager with a zero value it was returned to me with a please review this again and re-consider. When I told the manager I did re-consider and the answer was still "NO", the manager than stated that a one time donation of $5.00 is acceptable and than I would not have the monthly deduction. I re-affirmed my "NO" with a "ITS BASED ON A PRINCIPLE". The manager then took the card and handed in a differnet card with my name on it and $5.00 one time donation, so that his department met the 100% quota required by T.J. Rodgers. The first paystub that was given to me that should have not reflected any donations showed $5.00 donated to a charity. I spoke to HR about this situation and the $5.00 was returned to me on the next check.
    Now I ask you Mr. Rodgers, where are your morals, ethics and legal standards if this is the type of strong arming you require from your managers?

  • iriezorro||

    Thank you for this potent personal example. Hopefully the 'fans' of TJ below see that he is a hypocrite and in no subtle way in direct opposition to Friedmans' 1970 essay.

  • Haimerej||

    It seems to me that Friedman was correct in his assertion that the differences are rhetorical. I would say semantic. I believe that Friedman's philosophy has been perverted by his detractors because it relies upon individual choice and freedom. It opened the door to cynics to focus on the extreme negative aspects (inherent in ALL systems), which, IMO, ignores the fact that he constantly referred to the benefits of the system to the people that the detractors think it oppresses.

    It is in the "self interest" of Mackey to run a successful, profitable company. How else could he serve his desires of charity and "improv[ing] the health and well-being of everyone on the planet"? His "self interest" is helping others. People generally don't give to others if they don't want to, which serves a selfish desire to feel "good." Part of the reason his company is so successful is due to the public opinion of it. The company donating to charity is a self-interested venture, in that it influences public opinion by giving consumers the "selfish" feeling of satisfaction that their shopping contributes to charitable causes. This reputation Whole Foods has built increases their consumer base, which increases their profits, which increases the ability of Mackey to serve his self interest of philanthropy.

    The argument that it's not "driven" by a profit motive is fallacious. Take this statement, "While Friedman believes that taking care of customers, employees, and business philanthropy are means to the end of increasing investor profits, I take the exact opposite view: Making high profits is the means to the end of fulfilling Whole Foods' core business mission." That is semantics at best, fallacious at worst. Can you be profitable without doing what Friedman said? What profitable business doesn't cater to the customer? This argument ignores which came first, the business model or the profits? Obviously, he has a model that has proved extremely profitable.

    In closing, I believe Milton Friedman has been turned into a whipping boy of the left due to the manipulation of his philosophy with out-of-context quotation. This is a product of the "soundbite" culture we live in today. When Friedman said what he said, it was provacative. It was meant to be provacative. His mistake was perhaps giving people too much credit. Rather than making people say, "What does he mean by that?" today it makes people say, "What an evil man!"

  • Ray Ray||

    I just LOVE Mackey. Love him. Loved working at WF in high school. He has a point that IS sorta largely ignored by Libertarians, especially Rand fans- freedom means you can choose to build a company with whatever goals you have in mind. If whatever charitable donations he makes are pissed away and misused and never does anyone any good, and he has a warm squishy feeling inside, shareholders can go elsewhere. It's a voluntary arrangement.

  • RHP||

    Shareholders can also fire Mackey. It's a who works for who arrangement.

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  • netster007x||

    Milton Friedman is my favorite economic and political speaker. Mackey seems to know the right answer, but when he scorns Friedman's view as narrow and selfish, he really just adds fuel to freedom's detractors. I especially enjoyed TJ Rodgers' critique.

    I'm hoping to intern at Cypress.

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