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 4 of 5)

It is also simply good business for a company to cater to its customers, train and retain its employees, build long-term positive relationships with its suppliers, and become a good citizen in its community, including performing some philanthropic activity. When Milton Friedman says a company should stay "within the rules of the game" and operate "without deception or fraud," he means it should deal with all its various constituencies properly in order to maximize long-term shareholder value. He does not mean that a company should put every last nickel on the bottom line every quarter, regardless of the long-term consequences.

My company, Cypress Semiconductor, has won the trophy for the Second Harvest Food Bank competition for the most food donated per employee in Silicon Valley for the last 13 consecutive years (1 million pounds of food in 2004). The contest creates competition among our divisions, leading to employee involvement, company food drives, internal social events with admissions "paid for" by food donations, and so forth. It is a big employee morale builder, a way to attract new employees, good P.R. for the company, and a significant benefit to the community--all of which makes Cypress a better place to work and invest in. Indeed, Mackey's own proud example of Whole Foods' community involvement programs also made a profit.

But Mackey's subordination of his profession as a businessman to altruistic ideals shows up as he attempts to negate the empirically demonstrated social benefit of "self-interest" by defining it narrowly as "increasing short-term profits." Why is it that when Whole Foods gives money to a worthy cause, it serves a high moral objective, while a company that provides a good return to small investors--who simply put their money into their own retirement funds or a children's college fund--is somehow selfish? It's the philosophy that is objectionable here, not the specific actions. If Mackey wants to run a hybrid business/charity whose mission is fully disclosed to his shareholders--and if those shareholder-owners want to support that mission--so be it. But I balk at the proposition that a company's "stakeholders" (a term often used by collectivists to justify unreasonable demands) should be allowed to control the property of the shareholders. It seems Mackey's philosophy is more accurately described by Karl Marx: "From each according to his ability" (the shareholders surrender money and assets); "to each according to his needs" (the charities, social interest groups, and environmentalists get what they want). That's not free market capitalism.

Then there is the arrogant proposition that if other corporations would simply emulate the higher corporate life form defined by Whole Foods, the world would be better off. After all, Mackey says corporations are viewed as "selfish, greedy, and uncaring." I, for one, consider free market capitalism to be a high calling, even without the infusion of altruism practiced by Whole Foods.

If one goes beyond the sensationalistic journalism surrounding the Enron-like debacles, one discovers that only about 10 to 20 public corporations have been justifiably accused of serious wrongdoing. That's about 0.1 percent of America's 17,500 public companies. What's the failure rate of the publications that demean business? (Consider the New York Times scandal involving manufactured stories.) What's the percentage of U.S. presidents who have been forced or almost forced from office? (It's 10 times higher than the failure rate of corporations.) What percentage of our congressmen have spent time in jail? The fact is that despite some well-publicized failures, most corporations are run with the highest ethical standards--and the public knows it. Public opinion polls demonstrate that fact by routinely ranking businessmen above journalists and politicians in esteem.

I am proud of what the semiconductor industry does--relentlessly cutting the cost of a transistor from $3 in 1960 to three-millionths of a dollar today. Mackey would be keeping his business records with hordes of accountants on paper ledgers if our industry didn't exist. He would have to charge his poorest customers more for their food, pay his valued employees less, and cut his philanthropy programs if the semiconductor industry had not focused so relentlessly on increasing its profits, cutting his costs in the process. Of course, if the U.S. semiconductor industry had been less cost-competitive due to its own philanthropy, the food industry simply would have bought cheaper computers made from Japanese and Korean silicon chips (which happened anyway). Layoffs in the nonunion semiconductor industry were actually good news to Whole Foods' unionized grocery store clerks. Where was Mackey's sense of altruism when unemployed semiconductor workers needed it? Of course, that rhetorical question is foolish, since he did exactly the right thing by ruthlessly reducing his recordkeeping costs so as to maximize his profits.

I am proud to be a free market capitalist. And I resent the fact that Mackey's philosophy demeans me as an egocentric child because I have refused on moral grounds to embrace the philosophies of collectivism and altruism that have caused so much human misery, however tempting the sales pitch for them sounds.

Profit Is the Means, Not End
John Mackey

Let me begin my response to Milton Friedman by noting that he is one of my personal heroes. His contributions to economic thought and the fight for freedom are without parallel, and it is an honor to have him critique my article.

Friedman says "the differences between John Mackey and me regarding the social responsibility of business are for the most part rhetorical." But are we essentially in agreement? I don't think so. We are thinking about business in entirely different ways.

Friedman is thinking only in terms of maximizing profits for the investors. If putting customers first helps maximize profits for the investors, then it is acceptable. If some corporate philanthropy creates goodwill and helps a company "cloak" its self-interested goals of maximizing profits, then it is acceptable (although Friedman also believes it is "hypocritical"). In contrast to Friedman, I do not believe maximizing profits for the investors is the only acceptable justification for all corporate actions. The investors are not the only people who matter. Corporations can exist for purposes other than simply maximizing profits.

As for who decides what the purpose of any particular business is, I made an important argument that Friedman doesn't address: "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." Whole Foods Market was not created solely to maximize profits for its investors, but to create value for all of its stakeholders. I believe there are thousands of other businesses similar to Whole Foods (Medtronic, REI, and Starbucks, for example) that were created by entrepreneurs with goals beyond maximizing profits, and that these goals are neither "hypocritical" nor "cloaking devices" but are intrinsic to the purpose of the business.

I will concede that many other businesses, such as T.J. Rodgers' Cypress Semiconductor, have been created by entrepreneurs whose sole purpose for the business is to maximize profits for their investors. Does Cypress therefore have any social responsibility besides maximizing profits if it follows the laws of society? No, it doesn't. Rodgers apparently created it solely to maximize profits, and therefore all of Friedman's arguments about business social responsibility become completely valid. Business social responsibility should not be coerced; it is a voluntary decision that the entrepreneurial leadership of every company must make on its own. Friedman is right to argue that profit making is intrinsically valuable for society, but I believe he is mistaken that all businesses have only this purpose.

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. We want to improve the health and well-being of everyone on the planet through higher-quality foods and better nutrition, and we can't fulfill this mission unless we are highly profitable. High profits are necessary to fuel our growth across the United States and the world. Just as people cannot live without eating, so a business cannot live without profits. But most people don't live to eat, and neither must a businesses live just to make profits.

Toward the end of his critique Friedman says his statement that "the social responsibility of business [is] to increase its profits" and my statement that "the enlightened corporation should try to create value for all of its constituencies" are "equivalent." He argues that maximizing profits is a private end achieved through social means because it supports a society based on private property and free markets. If our two statements are equivalent, if we really mean the same thing, then I know which statement has the superior "marketing power." Mine does.

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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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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.