Social Responsibility Redux

Our October issue's Milton Friedman/John Mackey/T.J. Rodgers debate on corporate social responsibility provoked more reader mail than any other cover story I can recall; now it seems to have kicked off a blogospheric discussion. Tyler Cowen appears to view Friedman's famous dictum—that the only responsibility of business is to maximize profit—as more of a rhetorical move than a genuine position. Professor Bainbridge disagrees, and links to a paper defending the Friedman view. And Mark Kleiman offers what strikes me as a pretty good reductio of that position.

Comments

[georgio]

metafilter had a prettty good debate on this thru the rorschach lens of wal-mart.

[m g]

Karen decoster takes rodgers side at lewrockwell.com
http://www.lewrockwell.com/decoster/decoster106.html

[quasibill]

To some extent, I still see this as an artificial conflict. As long as the corporation, like Whole Foods, is explicit in its business model, investors know what they are getting into, and have no right to complain. It certainly is appropriate under the concept of personal responsibility to ensure that the money you invest is being used in ways that you find are moral and proper. Any other way of viewing corporate identities is just a way of avoiding personal responsibility.

It seems to me this issue is more about pissing rights between libertarians on one end and objectivists on the other.

[thoreau]

I agree with quasibill. One of the linked articles raised the question of whether anything is OK as long as the law is not explicitly violated. Since everybody (well, almost everybody) has some limit of assholery that he will not exceed, the question becomes where a company draws the line between acceptable and unacceptable practices.

Not only is this question not a fit subject of law, it probably doesn't have an objective answer. If there was a single "right" way to run a business then everything would be easy. In reality, nothing is, and different things work for different situations. As long as the model is working and the people who pursue it are honest with their investors, the debate is nothing more than a pissing contest. John Macky has taken a challenging model and made it work in a spectacularly profitable manner, and he's been completely honest with his investors (as far as I know). He should be respected for that achievement. End of story.

[Anon]

As an irrelevant aside, re-reading the debate, I was struck again by how deftly Mackey dispatches Rodgers -- who asked for it, of course, with his poorly researched cheap shot about Whole Foods' unionized grocery workers -- after showing such deference to Friedman. The man plays a good game.

Anon

[Jason Ligon]

I don't know about Kleiman's argument that Friedman's position requires the persuit of immoral but legal behaviour. For one, Friedman is clearly operating from a context of libertarian morality. If the legal system didn't prohibit fraud, for example, I don't think you would get an argument that there is an affirmative obligation on the part of companies to engage in fraud. The reason? Honestly disclosed transactions are part of the assumptions of a functioning capitalism - right up there with transportability of goods.

In other words, Friedman's comments presume a relatively free society where rights are broadly respected.

I agree that Whole Foods can do whatever they want and that thier shareholders know what they own - or should. My beef is with the suggestion that there is another responsibility of corporations than the maxmimization of shareholder value. That argument suggests that there is a moral obligation of some sort on all companies to have a structure in some ways like Whole Foods.

[quasibill]

I don't know if you're disagreeing with me or not, so I'll throw this out there:

"My beef is with the suggestion that there is another responsibility of corporations than the maxmimization of shareholder value."

I would say that corporations have the responsibility to do whatever it is they told their shareholders they would do. So if you market yourself as a socially progressive corporation to investors, you have a responsibility to be such. If, however, you market yourself as an amoral greed machine, you have no other responsibilities - you are free to invest in North Korean nuclear facilities, for example.

However, even if you market yourself as an amoral greed machine, people can justifiably criticize you on those grounds. They just have no right to initiate coercive force against you.

[georgio]

the point isn't whether corporations have a moral resp, it's that people/customers do. then the question is what is the proper business response to that?

what makes good business given people's moral beliefs with the caveat that people/certain demographics are free to believe and behave differently?

businesses almost by def should do what makes the most business sense, if that happens to be "social resp" practises then so be it.

it's not right or wrong or good or evil, it's what works or doesn't work. if it doesn't, then they cease to be in business. that's the beauty of capitalism/evolution.

if caring for the envrionment or developing human capital or garnering better PR gets you there, what's the problem? certainly you see it in the shares/market value of don't-be-evil-google, beyond-petroleum-BP, we-treat-our-workers-better-than-wal-mart-costco and now we-serve-organic-coffee-in-new-england-mcdonalds. etc. etc.

certainly it's not the only thing, so if and when it negatively impacts profits, you'll see it reflected in the market. otherwise, if it doesn't hurt, and may even help, expect more co's to jump on the "social resp" bandwagon.

[thoreau]

quasibill makes a good point. What if a company bills itself as a do-gooder, so a retirement home for nuns invests its endowment in it? And then the retired nuns find out that they've been investing in a company that buys surplus arms from corrupt Russian military officers and resells them to Chechen rebels?

(Right now, some bureaucrat in Moscow is thinking "Wow, what a great business model!" I'd just like to apologize in advance to all of the nuns who end up investing in this enterprise. I didn't mean to inspire him. And I'm not the one who gave him the idea of hiring teenagers and paying them with cheap heroin.)

Anyway, if a company says from day 1 that they'll be do-gooder, that isn't merely a "free pass" to do things that aren't directly profit-driven. It's an understanding with investors who want to invest in a particular kind of enterprise.

If a company told investors from day 1 that they would be the most ruthless profit-seekers on the planet, libertarians would applaud the honesty and chastise any investor who got upset. Likewise, if a company says from day 1 that they're going to be "kinder, gentler profit seekers", what right does an investor have to complain? He knew they wouldn't always be ruthless, and he invested anyway.

[scott]

thoreau,
I'm not an expert in corporate law, but I would suspect that the answer has something to do with whether a company is private or public. A private corporation can and should run its company the way it wants to. But as I understand it, the board of a public corporation has certain legal duties to shareholders that would preclude them from being "kindler, gentler profit seekers". I don't think the issue really comes up in the example at hand, however. As Friedman and Mackey both point out, Whole Foods "social responsibility" is a profitable marketing gimick (whether originally intended to be that way or not). Since the do gooder social schtick allows them to reap higher margins on their commodities relative to Superfresh or Acme, the shareholders have nothing to gripe about. As long as well off soccer moms and urban hipsters continue to buy into what Whole Foods is selling, there is no conflict.

[Phil]

Right, all of this rests on a definition of what "maximizing shareholder value" means, and it means different things depending on who the particular group of shareholders is. For one group, it means turning a $20 share price into a $25 share price. For another, it means turning a $20 share price into a $22 share price and a certain reputation in the marketplace. If you're a part of the latter group, don't invest in companies whose goal is the former.

[georgio]

well if you can "value intangibles," i don't see why there need by any conflict at all, public or private.

[thoreau]

In practice, there's always more than one way to do something. If a company decides that there are certain levels of assholery that it will not stoop to, and that a certain amount of charity is a good marketing schtick, that doesn't mean they've forsaken the pursuit of large profits.

Anyway, after my last post I decided on a career change. I hear there's a Russian Army Colonel in Chechnya who wants to unload some RPG launchers fast. I'm off to DC to round up some poor teenagers, then we'll all get on a plane and go off to make our fortune in the Caucasus.

If there are any nuns interested in investing, you can find me on Sunday mornings at St. Elizabeth's church just north of Bethesda. Unless I'm traveling on business.

[Uncle Sam]

threau
I presume that's Bethesda, MD
Do you know a certain astrophysicist who live on Rosedale Ave.?

[Uncle Sam]

thoreau, I meant

Anyway
TJ just comes across as an asshole.
The distinction being argued is whether society as a whole gains from the enrichment of a few (by moral/legal means) as is the case when business pays out to shareholders.

I say it does, as the few have increased ability to exchange with others, a trickle out theory.
An interesting question is which policy (Mackey vs Friedman) is of greater benefit to "society".

It may well be that operating according to Friedman is generally of greater benefit to "society" than operating according to Mackey's business model.

But then, we live in a society that believes there is such a thing as "altruism".

[thoreau]

Uncle Sam-

Yep, I'm in Maryland, but I don't know any astrophysicists out here.

Another thought: There are actually mutual funds devoted to social goals. There are environmentally conscious mutual funds that invest in companies that engage in practices that the fund managers deem "green." There's also a vice fund, devoted to alcohol, tobacco, weapons, and gambling. (Basically, it's devoted to having a good night on the town with your buddies 🙂

Both of these funds deliver returns for their investors. If investors want to invest in these types of companies, what's immoral about catering to them?

[Uncle Sam]

He's also an active libertarian, but if Rosedale doesn't ring a bell, then I guess you don't know Dean.

Nothing wrong with catering to "green" investors.

[Larry A]

Friedman's famous dictum?that the only responsibility of business is to maximize profit

It depends on the definitions of "business" and "profit."

Friedman seems to be limiting his definition of "business" to a for-profit corporation and his definition of "profit" to cash. His dictum may be valid for that limited example.

OTOH, there are other models.

For instance, I am a shareholder in a business, a non-profit corporation which is a shooting club. The responsibility of the business is to operate a shooting range so that it provides the maximum opportunity for members to enjoy shooting at modest expense. The club voluntarily takes on obligations to serve the local community by applying for grants from funding sources like the Friends of NRA. It also voluntarily opens certain events to public participation for different reasons; for instance to attract new members, increase participation in competitions, promote the future of the sport, and whatever other reasons the members (stockholders) think beneficial.

I am also a sole proprietor as a firearms instructor, so that business has one stockholder; me. I do make money, but a major part of my compensation for running the business is the satisfaction I get teaching people to shoot.

Therefore I would say that the only responsibility of a business is to maximize the benefits to the stockholders, as defined by the stockholders.

Thoreau: what right does an investor have to complain?

Everybody always has the right to complain. Else where would H&R be?

[Jason Ligon]

If a majority of shares are available for purchase, it is the shareholder who will determine the direction of the company. If a majority of shares are held out of public hands, shareholders will still determine the direction of the company, it just so happens that management and shareholders are the same people in that case.

[Activist shareholder]

I'm rather surprised by some of the responses here. Shareholders most certainly have a right to complain about how a company does its business. They're part-owners of said company! Stocks aren't just some random blips on your monitor, you know.

[Activist shareholder]

Yeah... what Jason Ligon said.

[quasibill]

"Shareholders most certainly have a right to complain about how a company does its business. They're part-owners of said company! Stocks aren't just some random blips on your monitor, you know."

Well, you always have a right to complain. Even if you're not a shareholder. The question is whether your complaints are well founded. So perhaps the better way to say it is that a minority shareholder is wrong if he says that the management is breaching its fiduciary duty for doing what it promised him it would do. If he doesn't like it when management changes directions, he can either try to form a majority voting block, or sell his share(s).

[Pro Libertate]

A caution about focusing only on maximizing shareholder equity: Wall Street is demanding returns on a per-second basis these days, which destroys any concept of long-term planning by publicly held companies. I exaggerate a bit, but the equation is more complicated than a simple number (i.e., EPS). In my corporate life, I have been appalled at how much damage a company will do to itself (and to its shareholders' long-term interests) for a brief spike in earnings or other performance indicators. Most shareholders (especially mutual funds) are in for the long haul, so short-term jumps in performance are about useless. Of course, they aren't useless to the executives, now are they?

As for ethics, it's foolish to try to eliminate that from the list of goals, even if it's unstated. Unprincipled executives will get you into financial trouble in the long run, mark my words. The get-rich-quick executives somehow forget about those shareholders when they can get their milk from the cow.

I'm not anti-corporation or free market at all, but our system is really screwed up, because executives are given incentives that are against the long-term interests of most companies. Period. Some shareholders are more equal than others, I guess.

[Capital-ism]

"I would say that corporations have the responsibility to do whatever it is they told their shareholders they would do. So if you market yourself as a socially progressive corporation to investors, you have a responsibility to be such."

Yah, yah, but then what moral responsibility do shareholders have? And isn't that the point?

[Rick Barton]

Jullian:

And Mark Kleiman offers what strikes me as a pretty good reductio of that position.

I disagree. From Kleiman:

So by this standard (Friedman's) a corporate officer must have an affirmative duty to seek out ROI-maximizing opportunities, no matter how morally disgusting, as long as they are not not actually illegal.

By this standard (Friedman's) , engaging in the slave trade, back when it was legal, would have been not merely permissible but required. So would financing munitions plants for the Nazis during the 1930s, or helping the Soviet Union during the Cold War, or Iraq in 2001, or Iran or North Korea today, as long as it managed to skirt actual illegality.

But these things clearly involve force and fraud, which are exceptions to Friedman's profit maximization precept! Kleiman also mentions: "inventing and marketing any dangerous and addictive drug that wasn't (yet) illegal." Here again, it's the absence or existence of misrepresentation (fraud) that sets our ethical line for us. Not the fact that they are "dangerous and addictive".

The adjustment that I would make to Friedman's formulation concerns the responsibility to shareholders. Instead of simply calling for a duty to maximize profits. He might advocate an ethical (but not legal) requirement of full disclosure to the shareholders when profit maximization is subordinated as a goal. And also, as a practical matter, he should advise caveat emptor on the part of the shareholders.

Some shareholders might have desires other than monetary profit maximization with regards to their stock. They might seek "different kinds of profit".

BTW, as a consumer, I sometimes press different values into action. I just started buying "cage free" eggs cuz I now found some that are also high in Omega 3s, like the eggs I sued to buy. The new eggs cost a little bit more, but I feel bad about chickens being locked in cages. I'm gonna contact the Egglands Best folks and tell them why I switched from their eggs and also tell them that if they quit keeping their chickens in cages, I'll switch back.

That monetary profit maximization can be demonstrated to not always be the *only* ethical pursuit of corporate officers in no way sanctions government forcing corporations to pursue goals other than monetary profit maximization, with the exception of the abstention of force and fraud.

[Rick Barton]

Sorry Julian. I misspelled your name. I think I better crash.

[Rick Barton]

I wrote: Here again, it's the absence or existence of misrepresentation (fraud) that sets our ethical line for us. Not the fact that they are "dangerous and addictive.

I probably should have said: "it's *mostly* the absence or existence of misrepresentation". But as a practice matter, poisoning the customers doesn't maximize profits anyway, so maybe the case of selling poisonous drugs doesn't really invalidate my statement.

[Rick Barton]

...and of course that shoulda been: "But as a *practical* matter, poisoning the customers doesn't maximize profits anyway,"

[Rick Barton]

Sorry. I was really wiped out and this part shoulda been:

"...cuz I now found some that are also high in Omega 3s, like the eggs I *used* to buy."

I gota start using the Preview button!

[Tyson Mackey]

Larry A--
I wrote a paper that expands on your argument and sentiments by Mark Kleiman that 'the only responsibility of a business is to maximize the benefits to the stockholders, as defined by the stockholders.'

You can find it here
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=816425

[Rick Barton]

the only responsibility of a business is to maximize the benefits to the stockholders, as defined by the stockholders!

Perfect!

[georgio]

besides, "goodwill" (even tho some of the most fudged numbers ever) is an established accounting concept.