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

(Page 2 of 5)

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.

That said, I believe such programs would be completely justifiable even if they produced no profits and no P.R. This is because I believe the entrepreneurs, not the current investors in a company's stock, have the right and responsibility to define the purpose of the company. It is the entrepreneurs who create a company, who bring all the factors of production together and coordinate it into viable business. It is the entrepreneurs who set the company strategy and who negotiate the terms of trade with all of the voluntarily cooperating stakeholders--including the investors. At Whole Foods we "hired" our original investors. They didn't hire us.

We first announced that we would donate 5 percent of the company's net profits to philanthropy when we drafted our mission statement, back in 1985. Our policy has therefore been in place for over 20 years, and it predates our IPO by seven years. All seven of the private investors at the time we created the policy voted for it when they served on our board of directors. When we took in venture capital money back in 1989, none of the venture firms objected to the policy. In addition, in almost 14 years as a publicly traded company, almost no investors have ever raised objections to the policy. How can Whole Foods' philanthropy be "theft" from the current investors if the original owners of the company unanimously approved the policy and all subsequent investors made their investments after the policy was in effect and well publicized?

The shareholders of a public company own their stock voluntarily. If they don't agree with the philosophy of the business, they can always sell their investment, just as the customers and employees can exit their relationships with the company if they don't like the terms of trade. If that is unacceptable to them, they always have the legal right to submit a resolution at our annual shareholders meeting to change the company's philanthropic philosophy. A number of our company policies have been changed over the years through successful shareholder resolutions.

Another objection to the Whole Foods philosophy is where to draw the line. If donating 5 percent of profits is good, wouldn't 10 percent be even better? Why not donate 100 percent of our profits to the betterment of society? But the fact that Whole Foods has responsibilities to our community doesn't mean that we don't have any responsibilities to our investors. It's a question of finding the appropriate balance and trying to create value for all of our stakeholders. Is 5 percent the "right amount" to donate to the community? I don't think there is a right answer to this question, except that I believe 0 percent is too little. It is an arbitrary percentage that the co-founders of the company decided was a reasonable amount and which was approved by the owners of the company at the time we made the decision. Corporate philanthropy is a good thing, but it requires the legitimacy of investor approval. In my experience, most investors understand that it can be beneficial to both the corporation and to the larger society.

That doesn't answer the question of why we give money to the community stakeholder. For that, you should turn to one of the fathers of free-market economics, Adam Smith. The Wealth of Nations was a tremendous achievement, but economists would be well served to read Smith's other great book, The Theory of Moral Sentiments. There he explains that human nature isn't just about self-interest. It also includes sympathy, empathy, friendship, love, and the desire for social approval. As motives for human behavior, these are at least as important as self-interest. For many people, they are more important.

When we are small children we are egocentric, concerned only about our own needs and desires. As we mature, most people grow beyond this egocentrism and begin to care about others--their families, friends, communities, and countries. Our capacity to love can expand even further: to loving people from different races, religions, and countries--potentially to unlimited love for all people and even for other sentient creatures. This is our potential as human beings, to take joy in the flourishing of people everywhere. Whole Foods gives money to our communities because we care about them and feel a responsibility to help them flourish as well as possible.

The business model that Whole Foods has embraced could represent a new form of capitalism, one that more consciously works for the common good instead of depending solely on the "invisible hand" to generate positive results for society. The "brand" of capitalism is in terrible shape throughout the world, and corporations are widely seen as selfish, greedy, and uncaring.This is both unfortunate and unnecessary, and could be changed if businesses and economists widely adopted the business model that I have outlined here.

To extend our love and care beyond our narrow self-interest is antithetical to neither our human nature nor our financial success. Rather, it leads to the further fulfillment of both. Why do we not encourage this in our theories of business and economics? Why do we restrict our theories to such a pessimistic and crabby view of human nature? What are we afraid of?

Making Philanthropy Out of Obscenity

Milton Friedman

By pursuing his own interest [an individual] frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

--Adam Smith, The Wealth of Nations

The differences between John Mackey and me regarding the social responsibility of business are for the most part rhetorical. Strip off the camouflage, and it turns out we are in essential agreement. Moreover, his company, Whole Foods Market, behaves in accordance with the principles I spelled out in my 1970 New York Times Magazine article.

With respect to his company, it could hardly be otherwise. It has done well in a highly competitive industry. Had it devoted any significant fraction of its resources to exercising a social responsibility unrelated to the bottom line, it would be out of business by now or would have been taken over.

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…