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)

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.

Here is how Mackey himself describes his firm's activities:

1) "The most successful businesses put the customer first, instead of the investors" (which clearly means that this is the way to put the investors first).

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John Schaffhausen|2.15.10 @ 11:43PM|#

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|10.14.11 @ 9:43AM|#

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.

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Haimerej|4.21.10 @ 9:43PM|#

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|4.30.10 @ 3:16PM|#

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|9.1.10 @ 4:53PM|#

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

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tiffany and company who |9.18.10 @ 5:33AM|#

It's a who works for who arrangement.

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netster007x|12.17.10 @ 12:27AM|#

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.