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 5 of 5)

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.

Both capitalism and corporations are misunderstood, mistrusted, and disliked around the world because of statements like Friedman's on social responsibility. His comment is used by the enemies of capitalism to argue that capitalism is greedy, selfish, and uncaring. It is right up there with William Vanderbilt's "the public be damned" and former G.M. Chairman Charlie Wilson's declaration that "what's good for the country is good for General Motors, and vice versa." If we are truly interested in spreading capitalism throughout the world (I certainly am), we need to do a better job marketing it. I believe if economists and business people consistently communicated and acted on my message that "the enlightened corporation should try to create value for all of its constituencies," we would see most of the resistance to capitalism disappear.

Friedman also understands that Whole Foods makes an important contribution to society besides simply maximizing profits for our investors, which is to "enhance the pleasure of shopping for food." This is why we put "satisfying and delighting our customers" as a core value whenever we talk about the purpose of our business. Why don't Friedman and other economists consistently teach this idea? Why don't they talk more about all the valuable contributions that business makes in creating value for its customers, for its employees, and for its communities? Why talk only about maximizing profits for the investors? Doing so harms the brand of capitalism.

As for Whole Foods' philanthropy, who does have "special competence" in this area? Does the government? Do individuals? Libertarians generally would agree that most bureaucratic government solutions to social problems cause more harm than good and that government help is seldom the answer. Neither do individuals have any special competence in charity. By Friedman's logic, individuals shouldn't donate any money to help others but should instead keep all their money invested in businesses, where it will create more social value.

The truth is that there is no way to calculate whether money invested in business or money invested in helping to solve social problems will create more value. Businesses exist within real communities and have real effects, both good and bad, on those communities. Like individuals living in communities, businesses make valuable social contributions by providing goods and services and employment. But just as individuals can feel a responsibility to provide some philanthropic support for the communities in which they live, so too can a business. The responsibility of business toward the community is not infinite, but neither is it zero. Each enlightened business must find the proper balance between all of its constituencies: customers, employees, investors, suppliers, and communities.

While I respect Milton Friedman's thoughtful response, I do not feel the same way about T.J. Rodgers' critique. It is obvious to me that Rodgers didn't carefully read my article, think deeply about my arguments, or attempt to craft an intelligent response. Instead he launches various ad hominem attacks on me, my company, and our customers. According to Rodgers, my business philosophy is similar to those of Ralph Nader and Karl Marx; Whole Foods Market and our customers are a bunch of Luddites engaging in junk science and fear mongering; and our unionized grocery clerks don't care about layoffs of workers in Rodgers' own semiconductor industry.

For the record: I don't agree with the philosophies of Ralph Nader or Karl Marx; Whole Foods Market doesn't engage in junk science or fear mongering, and neither do 99 percent of our customers or vendors; and of Whole Foods' 36,000 employees, exactly zero of them belong to unions, and we are in fact sorry about layoffs in his industry.

When Rodgers isn't engaging in ad hominem attacks, he seems to be arguing against a leftist, socialist, and collectivist perspective that may exist in his own mind but does not appear in my article. Contrary to Rodgers' claim, Whole Foods is running not a "hybrid business/charity" but an enormously profitable business that has created tremendous shareholder value.

Of all the food retailers in the Fortune 500 (including Wal-Mart), we have the highest profits as a percentage of sales, as well as the highest return on invested capital, sales per square foot, same-store sales, and growth rate. We are currently doubling in size every three and a half years. The bottom line is that Whole Foods stakeholder business philosophy works and has produced tremendous value for all of our stakeholders, including our investors.

In contrast, Cypress Semiconductor has struggled to be profitable for many years now, and their balance sheet shows negative retained earnings of over $408 million. This means that in its entire 23-year history, Cypress has lost far more money for its investors than it has made. Instead of calling my business philosophy Marxist, perhaps it is time for Rodgers to rethink his own.

Rodgers says with passion, "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." Rodgers is entitled to be proud. What a wonderful accomplishment this is, and the semiconductor industry has indeed made all our lives better. Then why not consistently communicate this message as the purpose of his business, instead of talking all the time about maximizing profits and shareholder value? Like medicine, law, and education, business has noble purposes: to provide goods and services that improve its customers' lives, to provide jobs and meaningful work for employees, to create wealth and prosperity for its investors, and to be a responsible and caring citizen.

Businesses such as Whole Foods have multiple stakeholders and therefore have multiple responsibilities. But the fact that we have responsibilities to stakeholders besides investors does not give those other stakeholders any "property rights" in the company, contrary to Rodgers' fears. The investors still own the business, are entitled to the residual profits, and can fire the management if they wish. A doctor has an ethical responsibility to try to heal her patients, but that responsibility doesn't mean her patients are entitled to receive a share of the profits from her practice.

Rodgers probably will never agree with my business philosophy, but it doesn't really matter. The ideas I'm articulating result in a more robust business model than the profit-maximization model that it competes against, because they encourage and tap into more powerful motivations than self-interest alone. These ideas will triumph over time, not by persuading intellectuals and economists through argument but by winning the competitive test of the marketplace. Someday businesses like Whole Foods, which adhere to a stakeholder model of deeper business purpose, will dominate the economic landscape. Wait and see.�

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…