The Debate Over Corporate Social Responsibility: Reevaluating Milton Friedman's Profit-Centric Perspective

The school of thought espoused by economists such as Milton Friedman enshrines the principle that profit is the only concern of an organization and thus profit is the main, or only driver that need be of concern. On the other hand, others believe that organizations have a wider responsibility than making money for their shareholders. Create a paper for presentation to the Board of Directors that argues against the Friedman view and proposes how the organization should develop in a socially responsible manner.

Introduction

Milton Friedman proposed the idea that the most important or the only driver for a business organization’s endeavours is profit (Friedman, 1993). He was very critical of businesses and businessmen who spoke about the social responsibilities of business and who espoused the idea that there are be some social ends that ought to be pursued by business (Friedman, 1993, p. 249). In his own words, “the discussions of the social responsibilities of business are notable for their analytical looseness and lack of rigour” (Friedman, 1993, p. 249). This suggests that any arguments for corporate social responsibility are not sound academically, theoretically, or practically. This is far from the truth.

While there is real merit in the idea of profit being a driver for business enterprise, it is argued that Friedman’s idea of it being the sole driver of enterprise, is fundamentally debatable. There are valid reasons why such a view can be and should be contested. These reasons will be discussed in this essay to argue against Milton Friedman’s premise that the only social responsibility of the business is to make profit. The essay seeks to make a case for the development of a business in a socially responsible manner.

1.1.1 Historical significance of corporate social responsibility

The idea of corporate social responsibility is not a new idea and it has been espoused by economists and thinkers even in the early period of the 20th century. Writings from this earlier period suggest that there was a concern about the social responsibilities of businesses and corporations even in the earlier time. Therefore, to dismiss such discussions on the grounds of analytical looseness and lack of rigour” (Friedman, 1993, p. 249), is also dismissive of an academic and theoretical precept of sufficient credibility.

From a historical point of view, corporate social responsibility is seen to have evolved as a definite construct (Carroll, 1999). One of the first advocates of corporate social responsibility was Merrick Dodd, who argued that the business enterprises and corporations have both social service and profit making functions (Hopkins, 2012, p. 2). This is suggestive of the idea that although the principal function or driver of a business enterprise is profit-making, business also has some social functions to perform.

Social responsibility of the business enterprise has become an important issue in the business enterprise and although it was written about sporadically in the 1930s, the issue came to occupy an important place in the theory and practice of law, economics and politics in the context of business enterprise by the 1960s (Hopkins, 2012, p. 1).

It is seen that the period starting from 1950s has seen an expansion in the definitions of corporate social responsibility and also an evolution of themes related to corporate social responsibility, including corporate social performance, stakeholder theory, business ethics theory, just to name a few (Carroll, 1999). These themes are discussed in the following sections.

1.1.2 Stakeholders

Shareholders are important stakeholders in the business enterprise. After all, they contribute to the capital of the enterprise and have a strong interest in the profitability of the business so that their investments give returns for them. Shareholders are the most impacted by bad decision making in the company because such decisions impact the the stock value of the company and ultimately the profitability of the company (McWatters & Zimmerman, 2015). However, there are other important stakeholders in the business enterprise and their interest in the enterprise must also be a matter of concern for the business organisation. Stakeholders are any parties that are affected by the organization, which may not only be shareholders but also creditors, customers, employees, government and society at large (McWatters & Zimmerman, 2015, p. 13). Managers, employees, business partners, contractors and suppliers, natural environment and the communities within which businesses operate and along with shareholders these make the seven azimuths of a business enterprise (Hopkins, 2012, p. 3).

The business enterprise is driven by profitability, and to achieve this profitability, it is important that the business harnesses the social and economic forces that are central to this profitability. Businesses lose credibility when they get caught in negative social events, that may be solely driven by the profit motive, but fails to take into account the social repercussions of such events. These negative events may include: arbitrary and ‘cavalier’ downsizing driven by cost cutting objectives; environmental disasters driven by lack of application of ethics and a sole drive to make more money (Hopkins, 2012, p. 4). On the other hand, those business enterprises that show holistic concern for all stakeholders, are ultimately benefitted by the stronger social approval for it.

One writer says:

“Just as communities contribute via social capital to the profitability of firms and their production of private goods, and to the soundness of government and their production of public goods, so presumably can both the economic and the political spheres…be harnessed to contribute to the welfare of communities and their production of social goods” (Wicks, 2009, p. 556).

Therefore, here the strong interest of the society as a stakeholder plays an important role in the shaping of corporate social responsibility plan of the business enterprise. Two strong arguments that relate corporate profitability to social responsibility in the recent times are the Triple Bottom Line and Shared Values approach.

The Triple Bottom Line principle advocates the inclusion of the broad interests of society into corporate objectives by measuring the business enterprise’s performance from the perspective of economic, environmental, and social value added (Elkington, 1999). This also helps to increase the accountability of the enterprise in the society (Harrison & Wicks, 2013). The "shared value" approach, encourages the enterprise to generate profits that also relate to social benefits (Porter & Kramer, 2011).

The two approaches mentioned above are indicative of the recent approaches in the debate on corporate social responsibility in the management literature (Harrison & Wicks, 2013). This is also about creating a ‘value’ that is not only to be seen from the economic perspective but also from the perspectives of social, environmental, and moral values (Harrison & Wicks, 2013). The obvious moral values involved in the stakeholder theory help to relate it to the precepts of corporate social responsibility (Phillips & Freeman, 2008).

1.1.3 Concerns about business ethics

Business enterprises have come under intense scrutiny in the recent period of time. The 2007-08 sub-prime crisis, the failure of major banks and investment funds and the ensuing global depression has brought to fore issues of business ethics. Many Multi National Corporations (MNCs) such as Lehman Brothers, ENRON, Toyota and General Motors have either broken down or been involved in controversies that bring attention to the entire mechanism of the business enterprise and how it affects matters with social and economic significance (Dörrenbächer & Geppert, 2011).

Recently, a lot of corporate social responsibility movement has come to the fore in the business enterprises and MNCs around the world. It is seen that the MNCs have now developed a greater sensitivity to the issue of corporate social responsibility. Especially when these MNCs function in their host countries, they take care to ensure that they work with ethics (Blanton & Kegley, 2016). Here ethics also relate to rights of stakeholders and human rights in general (Blanton & Kegley, 2016). It is also true that the MNCs are now increasingly under the spotlight. Governments, NGOs and social organisations are now more concerned in the functioning of the business enterprises and this means that now business enterprises have to be more serious about their corporate social responsibilities (Blanton & Kegley, 2016).

1.1.4 Corporate social performance

Corporate social performance is not just driven by national level factors or industry level factors, it is also driven by firm level factors, where the perceptions of employees, managers and directors are also keenly impactful on corporate social performance (Orlitzky, Louche, Gond, & Chapple, 2015). In recent times, studies have also shown the positive relationship between gender diversity in the board of directors and the level of corporate social performance of the company, as the ‘empathy’ value of corporate social performance especially appeals to female directors (Boulouta, 2013). This signifies a strong firm level impact on social performance. It is also pertinent to note that corporate social performance has a very positive relationship with employee perceptions about their firm and leads to a higher level of employee commitment to firm and its objectives‬ (Greening & Turban, 2000).

Finally, there is now a plethora of empirical studies that suggest that respectable levels of corporate social performance have a positive outcome for sales and market perceptions (Auger, Burke, Devinney, & Louviere, 2003). Companies with a higher corporate social performance also demonstrate a significantly lowered business risk (Orlitzky & Benjamin, 2001).

It can be said that corporate social performance has several benefits for the business enterprise, which are discussed in more detail in the following section.

1.2 Corporate social performance and profitability

1.2.1 Introduction

Corporate social performance has important benefits for the business enterprise. Some of these benefits are directly related to profitability of the enterprise. Therefore, it is incorrect to perceive corporate social responsibility only from the perspective of philanthropy or social welfare. In this section, the essay discusses the positive impact of corporate social responsibility and the profitability of the firm.

1.2.2 Benefits of corporate social responsibility to business

Corporate social responsibility has decided benefits for corporations and business enterprises. Enterprises have noted that corporate social responsibility is good for business. The seven azimuths of business, which are: shareholders and potential investors; managers; employees; business partners; contractors and suppliers; natural environment and the communities within which businesses operate (Hopkins, 2012, p. 3). These are the stakeholders of the business enterprise and one study shows that an emphasis on these stakeholders does not really hinder the profitability of the company (Hopkins, 2012, p. 4).

Corporate social responsibility has become an essential part of corporate policy of companies around the world. This is evident from the fact that more companies are now adopting corporate social responsibility plans as well as companies that are particularly involved in social values. Even laws have responded to this change. In the US, for instance, legislations allow incorporation of ‘Benefit Corporations’, which combine profit making with social objectives (Brown, 2011). In France, “New ‬Economic Regulations” ‬law of 2001 requires French listed companies ‬to publish ‬corporate social responsibilities activities data in ‬their annual ‬reports (Ducassy, 2013).

Robert Reich postulated on the importance of “stakeholder capitalism,” which involves giving consideration to employees and customers at the time of decision-making, in contrast with “shareholder capitalism” that only focusses on making profits for the shareholders (Semuels, 2014). Firms that focus only on making profits for one stakeholder, that is shareholders, without regard to other stakeholders, such as society, indulges in shareholder capitalism which will yield negative perceptions of the firm and impact its long term sustainability (Semuels, 2014). Therefore, it is important that business enterprises give value to social benefits that it can drive through its activities.

It is incorrect to think of corporate social responsibility as simply a charitable or philanthropic exercise. Although, the ultimate objective of these activities is deriving social good, these activities are also useful in providing benefits to the business enterprise.

One advantage of corporate social responsibility is that it may act as a buffer in times of crisis. One study studied the relation between levels of corporate social responsibility in the firm with the crisis period events, stakeholder-based and integrity-based (Godfrey, Merrill, & Hansen, 2009). The study found that corporate social performance provided an ‘insurance-‬like’ benefit in times of crisis with the positive perceptions of the firm helping in crisis management (Godfrey, Merrill, & Hansen, 2009). Corporate social responsibility to the business enterprise is seen during the time of crisis. It is seen that firms that invest time, money and effort in developing corporate social responsibility reap the rewards should the firm be in a crisis at some time (Ducassy, 2013). This study reveals a positive relationship between corporate social responsibility and crisis management based on data collected from French companies.

Another advantage of corporate social responsibility is that observance of these principles can actually help the business enterprise to avoid law suits against itself (Barnett, Hartmann, & Salomon, 2014). This study involved observing1047 firms from 46 countries in a period spanning from 2002 through 2012 (Barnett, Hartmann, & Salomon, 2014). For the purpose of this study, corporate social responsibility was divided into environmental, social, and governance practices. The study found that corporate social responsibility helps repel lawsuits and companies that paid attention to environmental, social and governance related issues of corporate social responsibility actually had lesser involvement in law suits (Barnett, Hartmann, & Salomon, 2014).

Ultimately, these benefits also spill into profitability of the firm. A good example of this is seen in a study of firms during the 2008-2009 financial crisis period (Lins, Servaes, & Tamayo, 2016). The study found that those firms which had strong corporate social responsibility track record, as seen in their high social capital, showed higher stock value (Lins, Servaes, & Tamayo, 2016). Such firms were found to have stock returns that were four to seven percentage points higher than those firms which had not involved themselves with corporate social activities at all, or had a law social capital (Lins, Servaes, & Tamayo, 2016). More importantly, the study found that firms with high social capital had higher profitability, better growth prospects, and higher sales, as compared to those firms which had low social impact (Lins, Servaes, & Tamayo, 2016). Companies with higher social capital also demonstrated an ability to raise more debt as compared to companies with lower social capital (Lins, Servaes, & Tamayo, 2016). The findings are even more important if seen from the perspective of how the market was during the period of the study, where there were generally negative perceptions about companies due to the debacle of some of the big companies like ENRON and Lehman Brothers. It shows that indeed following corporate social responsibility pays off dividends in times of crisis and uncertainty. It is little wonder then that some of the successful companies around the world have shown a tendency to pay serious attention to corporate social responsibility, not only as a social endeavor but also as something that is actually beneficial to the firm itself (Varenova, Samy, & Combs, 2013). This study found that businesses consider profitability and respect for stakeholders as not contradictory but symbiotic priciples (Varenova, Samy, & Combs, 2013). Importantly, those businesses that are socially responsible actively and positively view corporate social responsibilities as an important aspect of their commercial interests (Varenova, Samy, & Combs, 2013). Such businesses view corporate social responsibility to be to their competitive advantage and consequently, apply these activities not as a luxury but a necessity (Varenova, Samy, & Combs, 2013). One study showed the positive impact of corporate social performance on the profitability of firms within profitability industry (Kanga, Leeb, & Huhc, 2010). This suggests that where the social reputation of the firm does have an impact on its profitability.

Friedman’s approach towards corporate social responsibility is faulty because it does not take into consideration actual benefits that are derived by the firm that pays attention to its social responsibilities. Friedman seems to think that observance of social responsibilities is only for charitable or philanthropic purposes and therefore he fails to understand how the observance of such social responsibilities do pay dividends for firms. If viewed from the latter perspective, it is clear that if profitability is the sole driver for the firm’s endeavours, then such profitability is enhanced by the social capital earned by the company. This is clear from the experiences of firms in times of crisis when the company has been able to do better crisis management due to positive perceptions of itself.

1.3 Conclusion

Corporate social responsibility is not a new concept. Rather, it is a principle that has evolved over a period of time. To dismiss it as an incoherent idea that suffers from “analytical looseness and lack of rigour” is akin to sweeping aside a whole body of empirical and theoretical literature devoted to the benefits of corporate social responsibility for the business enterprises.

It is incorrect to treat corporate social responsibility as simply a social welfare and philanthropic idea. If that were so, so many successful companies in the world would not have applied it as a part of their commercial interests. A number of studies have attested to decided benefits for firms that observe corporate social responsibilities that is reflected in the higher social capital for the firms. These benefits include a buffer during the time of crisis, better perceptions of the company by its employees, therefore higher employee commitment and also a protection against law suits. Indeed, companies with a higher social capital have demonstrated all these benefits to itself in a number of studies. In fact, studies show that those companies that have a higher social capital demonstrated a higher stock value during the financial crisis of 2007-2008, when in general market was impacted by low confidence.

Even from the perspective of Friedman, where he says that profit should be the sole driver of a business enterprise, it is important to note that such profitability is enhanced in companies that have a stronger sense of responsibility towards social good. It is important to understand that shareholders are not the only stakeholders in the firm. Other stakeholders play a crucial role in the long term sustainability of the firm. Therefore, corporate social responsibility pays in the long run.

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