Rethinking the Social Responsibility of Business

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

From the October 2005 issue

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 em�ployment, eliminating discrimination, avoid�ing pollution and whatever else may be the catchwords of the contemporary crop of re�formers."

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 "preach�ing pure and unadulterated socialism. Busi�nessmen who talk this way are unwitting pup�pets 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 [e-mail].

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.

Comments

Pingback| 10.15.09 @ 10:30PM

Elinor Ostrom, John Mackey and Milton Friedman « Scarcity and Inequality links to this page. Here’s an excerpt:

…do I post about John Mackey, than this appears: John Mackey is an entrepreneur, and an intelligent, thoughtful man concerned with the welfare of his employees.  This debate between Mackey, Milton Friedman and T.J. Rodgers is well worth a read.  Milton counters Mackey’s claim that corporate social responsibility is an end in itself by quoting himself circa 1970: “Of course, in practice the…

Pingback| 10.16.09 @ 4:10PM

John Mackey’s Conscious Capitalism: Abridged Version @ MyAware links to this page. Here’s an excerpt:

…and free individuals. In late September, Mackey sat down with Reason's Matt Welch and Nick Gillespie to talk about health care reform, corporate social responsibility (on which Mackey has written for Reason), why government interventions rarely achieve their goals, and how Mackey came to his unstinting belief in free markets. Approximately five minutes. Shot by Dan Hayes and Meredith Bragg. Edited…

Pingback| 10.16.09 @ 4:10PM

John Mackey’s Conscious Capitalism: Full Interview Version @ MyAware links to this page. Here’s an excerpt:

…and free individuals. In late September, Mackey sat down with Reason's Matt Welch and Nick Gillespie to talk about health care reform, corporate social responsibility (on which Mackey has written for Reason), why government interventions rarely achieve their goals, and how Mackey came to his unstinting belief in free markets. Approximately five minutes. Shot by Dan Hayes and Meredith Bragg. Edited…

Pingback| 10.20.09 @ 2:23PM

John Mackey’s Conscious Capitalism: Abridged Version @ MyAware links to this page. Here’s an excerpt:

…and free individuals. In late September, Mackey sat down with Reason's Matt Welch and Nick Gillespie to talk about health care reform, corporate social responsibility (on which Mackey has written for Reason), why government interventions rarely achieve their goals, and how Mackey came to his unstinting belief in free markets. Approximately five minutes. Shot by Dan Hayes and Meredith Bragg. Edited…

Pingback| 10.20.09 @ 2:23PM

John Mackey’s Conscious Capitalism: Full Interview Version @ MyAware links to this page. Here’s an excerpt:

…and free individuals. In late September, Mackey sat down with Reason's Matt Welch and Nick Gillespie to talk about health care reform, corporate social responsibility (on which Mackey has written for Reason), why government interventions rarely achieve their goals, and how Mackey came to his unstinting belief in free markets. Approximately five minutes. Shot by Dan Hayes and Meredith Bragg. Edited…

Pingback| 10.27.09 @ 1:06PM

class cancelled today « Honors 180 links to this page. Here’s an excerpt:

…as we will discuss the Friedman and the Winkler, take a look at this interview with Friedman on these subjects. You do not have to comment on this interview, but feel free. http://reason.com/archives/2005/10/01/rethinking-the-social-responsi from → Uncategorized No comments yet Click here to cancel reply. Leave a Reply Name (required): Email (required): Website: Comment: Note: You can use basic XHTML in…

Pingback| 11.3.09 @ 5:21PM

Re-read the interview for next time. And read about philosophy papers. « Honors 180 links to this page. Here’s an excerpt:

…2009 November 3 by utilitynussbaumrand I like this guide to writing philosophy papers. Let me know what you think. Link. Here is the interview with Friedman, Mackey and Rodgers again. RE-READ IT. Link. from → Uncategorized No comments yet Click here to cancel reply. Leave a Reply Name (required): Email (required): Website: Comment: Note: You can use basic XHTML in your comments. Your email address…