Tag: #friedman

Friedman’s critique of CSR at 50: birthday surprises

By Jeremy Moon

Sorry I am late in sending a 50th birthday card for Milton Friedman’s essay “The Social Responsibility of Business Is to Increase Its Profits [1]. Many would say that it is a birthday not worth celebrating. I agree with my colleagues Steen Vallentin (see blog) and Sandra Waddock (see blog) that we should move beyond Friedman’s assumptions and prescriptions. So why do I use a seemingly outdated newspaper article in my introductions to courses on corporate social responsibility (CSR)? In Steen’s terms, should I continue to flog the ‘somewhat dead horse’? As I think this horse still has legs I wouldn’t flog it, but I would continue to take some of the CSR journey with it. And here’s why. 

By reading and thinking about “The Social Responsibility of Business Is to Increase Its Profits” students have gained insights into how business and its context changes, and into some key abiding issues (e.g. the relationship of business responsibility to government, the purpose of business). Friedman packs an awful lot into the essay. Despite my belief that it is anachronistic and misguided in parts, Friedman – sometimes unwittingly – brings a few interesting surprises to the class.

Surprise No. 1 is that it was even worth penning a critique of business social responsibility in 1970. It is sometimes assumed – especially in business schools – that business concerns with responsibility and sustainability are relatively new fads (the sad truth is that many schools have been slow to address these concerns). But, yes, there was a lot of talk about CSR in the late 1960s USA, and Friedman castigates GM Motors for its social initiatives. So CSR is not new but it has its ups and downs. Its focal issues, modes and rationales differ over time and vary among contexts.  

The biggest change to CSR since 1970 is probably globalization bringing with it global supply chains and new corporate agendas of responsibility for labour & human rights and for the natural environment. Friedman envisaged that the only governments relevant for social issues were democratically accountable (i.e. American) and thus did not envisage the difficult responsibility issues for corporations in sourcing from, and selling to, countries which are undemocratically and corruptly governed. 

Surprise No. 2 is for those who know that Milton Friedman had already achieved fame or infamy for his libertarian position. In his book Capitalism and Freedom (1962), he presented government as inefficient and ineffective on key public policy issues. As Sandra Waddock points out, neo-liberalism, of which Friedman is a standard-bearer, generally contends that ‘less government is invariably good’. Yet in “The Social Responsibility of Business” Friedman is positive about government as an accountable and competent actor for resolving societal problems.

Friedman suggests a dichotomous view of the responsibilities of government and business because he assumed that business could best pursue its responsibilities – to increase profits – unencumbered by public policy obligations, and that government could legitimately raise taxes to address social issues. But this dichotomy rather belies the realities, then and now, of business organizations seeking favorable governmental intervention in markets and society… and of governments seeking business contributions to addressing societal challenges.

Surprise No. 3: Friedman acknowledges the virtue of social investments by business … ‘excuse me?’. Yes. In a rather over-looked passage, he comments that: 

It may well be in the long-run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees …or have other worthwhile effects.

M. Friedman (1970). “The Social Responsibility of Business Is to Increase Its Profits”, p. 124 col. 3.

This looks like an early version of the business case for CSR – re-labeled Creating Shared Value by Porter & Kramer [2]? But Friedman just doesn’t want you to call social investments CSR. Like today’s critics of CSR, Friedman sees this cloaking of a business strategy as a form of “window-dressing” and as “approaching fraud”. This introduces the fascinating point of class discussion about whether something can be described as socially responsible if it also benefits the benefactor, and specifically the corporate benefactor?

Surprise No. 4 is for students of business and management.  It lies in Friedman’s misrepresentation of corporate governance. His main argument about CSR constituting misuse or even theft of shareholders’ property is predicated on his contention that shareholders are the legal owners of publicly traded corporations. But in fact the corporation itself owns its assets: indeed the whole point about limited liability is that shareholders are exempted from liabilities that would otherwise rest on owners [3]. Of course, there are duties to shareholders – legal and ethical – but these are tempered in corporate governance regulation and judicial rulings (details vary among jurisdictions).

This is also a surprise for some corporate critics who see the problem of corporate irresponsibility as simply a function of a shareholder model [4].  In other words, they believe Friedman’s myth of the managers simply being the agents of shareholders. That this myth has achieved such standing is, perhaps partly testimony to the appeal that Friedman’s argument has had… and another reason why I like to introduce him to students.  

Surprise No. 5 is one that, in retrospect, Friedman himself may have had to face. It is clear that investors do not conform to his fairly unidimensional assumptions of shareholders’ motivation: not all are interested in short-term profit. Some are motivated by long-term security of their investment and others by values (e.g. avoidance of risky products, preference for products not tested on animals). Today we see evidence of greater mainstreaming of investor concerns with sustainability issues that Friedman would have contended are beyond corporate responsibility and which are properly in the sphere of government (see Rasche blog).  

Of course, much else has changed which students like to ponder, including:

  1. the extent to which corporations adopt the business case for responsible and sustainable goods and services, be it for their own sake, or reflecting changing consumer, employee or investor preferences or, more broadly, reflecting their understanding of the expectations of societies and regulators.
  2. the institutionalization of CSR through private authority (principles, standards, audits, reports) and its intersection with civil society and democratic government.
  3. skepticism about corporate motivation for “promoting desirable social ends” is no longer the sole prerogative of libertarians like Friedman (and Hayek).  I now also comes from the very socialist perspectives that Friedman feared the most.

So yes, we certainly need to move on, but we may move on more assuredly if part of our journey (on horseback or otherwise) is engaged in the conversation he spurred (sorry for flogging these equine metaphors…). 

References

[1] M. Friedman “The Social Responsibility of Business Is to Increase Its Profits”, New York Times Magazine, 13 September 1970.

[2] M. Porter & M. Kramer “Creating Shared Value”  Harvard Business Review, Jan  – Feb 2011.

[3] E.g. Lynn A. Stout. The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public, 2012.

[4] E.g. Not Fit-for-Purpose: The Grand Experiment of Multi-Stakeholder Initiatives in Corporate Accountability, Human Rights and Global Governance (Summary Report), MSI Integrity, 2020.

About the Author

Jeremy Moon is Professor at Copenhagen Business School, Chair of Sustainability Governance Group and Director of CBS Sustainability. Jeremy has written widely about the rise, context, dynamics and impact of CSR.  He is particularly interested in corporations’ political roles and in the regulation of CSR and corporate sustainability.

Photo Source: Milton Friedman blowing out the candles on his birthday cake, while his wife Rose and other party attendees look on. 15 July 1987. ©Hoover Institution Archives.

Economics for Life

Time for a New Economics

By Sandra Waddock

Steen Valentin recently pointed out in a BOS blog that we – and particularly economists – need to look beyond Milton Friedman’s famous New York Times argument that ‘The social responsibility of business is to increase its profits’. Friedman’s argument underpins today’s dominant ideology and the economics that shapes it – neoliberalism.

Neoliberalism has a core and often repeated set of tenets or memes – the core building blocks of narratives and of culture (ideas, phrases, words, images, symbols). These well-rehearsed memes include that markets and trade are ‘free’, economic actors are self-interested profit maximizers, free markets will resolve societal problems, responsibility is individual, less government is invariably good, and continual economic growth through globalism is feasible and desirable.

Fundamentally, Friedman stated that the sole purpose of the firm is to maximize profits or shareholder wealth, despite that shareholders are, as Charles Handy long ago pointed out, hardly actual owners of the firm in any real sense.

This narrative completely overlooks both societal and ecological impacts of economic activity because nature is completely ignored, even assumed away.

As former UK Prime Minister once put it, ‘There is no such thing as society’. More to the point, Thatcher also stated, ‘There is no alternative’ to neoliberalism, a phrase that got shortened to TINA – still widely believed today.

There Really Are Alternatives!

Is there really no alternative? Particularly in the era of the Covid-19 pandemic, climate emergency, massive species extinction, and growth global inequality? In a recent paper ‘Reframing and Transforming Economics around Life’ I argued for just such an alternative, and also that economics that supports all of life needs to be the mainstream economic orthodoxy. It cannot be considered ‘heterodox’ or come with a modifier that sets it apart from the mainstream.

That means finding new memes as powerful and compelling as the neoliberal ones they need to replace.

Such thinking, while fundamentally based in economics, also needs to encompass core societal and ecological considerations to reframe how business is done and how economic activity in general is undertaken.

The paper synthesizes six new memes that frame an economics in support of all of life. It draws from a wide swath of economics and other literature (including now ‘heterodox economics’) and supports new approaches like Kate Raworth’s doughnut economics – with a few core memes. The six memes are briefly described below.

Six Core Memes for Economic Orthodoxy in Support of All of Life
  • The first new meme is stewardship of the whole, which means that all economic actors have a shared responsibility for the whole system (or nested set of subsystems) that their activities impact. This meme explicitly recognizes both the broader social – societal – system in which economic activity is embedded – and the natural environment in which societies are intimately, inextricably, and interdependently nested. The good of whole systems needs to be kept constantly in mind, whether that is the good of a whole company, a community, a nation, or the planet itself.
  • Another is Co-creating Collective Value. Here I draw from the pioneering work of Donaldson and Walsh, who stated the purpose of business as creating collective value absent dignity violations. The idea of co-creation invites collective participation in the production of value for the whole system – not just for one stakeholder but for the many that are affected by businesses and other economic actors. Multiple values and multiple stakeholders will inevitably mean new metrics by which to assess economic productivity and activity. Co-creating collective value brings back the original meaning of wealth, which has been corrupted to meaning only financial wealth, but which originally meant health, wellbeing, and prosperity.
  • A third relates to cosmopolitan-localist governance. The idea here is that though we live in a globalized world (and some things will remain globalized), many decisions – economic and other – need to be placed at the most local level feasible. That ensures access, voice, and participation by many more actors, and encourages sharing of ideas, knowledge, and other resources in contextually appropriate ways.
  • A fourth is that of regeneration, reciprocity, and circularity, which acknowledges the interconnectedness and interdependence of humans and nature, and that todays so-called take-make-waste production processes are no longer either truly efficient from a whole systems perspective. Regeneration means that production processes need to allow time for the Earth to regenerate resources that will be needed long into the future. Reciprocity means that trade and exchanges need to be mutually beneficial among other humans and with respect to nature. Circularity embodies the idea that ‘waste equals food’ as frequently expressed by the concept of circular economy.  
  • The precept of relationship and connectedness places human economic and social activity into the full complexity and ‘wickedness’ of its connected and relational socio-ecological context. It recognizes that people are social creatures by nature, who only exist in the context of community. It acknowledges, as the African saying Ubuntu goes, ‘I am because we are’.
  • Finally, equitable markets and trade recognizes that markets exist and are important to meeting real (not manufactured) human needs, and that they need to be fair to all participants throughout the supply chain. That means that products and services need to be fully-costed and priced accordingly – and that all so called ‘externalities’ or negative by-products of production need to be incorporated into prices.

Though far more detail is provided in the actual paper, this brief outline synthesizes some of the core aspects of a framing for economics that has the potential to support all of life, rather than as is the case with neoliberalism, ignoring life and our Earth itself as a living system. It is past time for such a shift in thinking – and core memes – to take place. These ideas are offered as a tentative framework for beginning to reshape economic thinking in the direction of what works for all of life – wealth in its original meaning!

Further Reading

Sandra Waddock, Reframing and Transforming Economics around Life, Sustainability, 2020, 12, 7553; doi: 10.2290/su1218755

About the Author

Sandra Waddock is the Galligan Chair of Strategy, Carroll School Scholar of Corporate Responsibility, and Professor of Management at the Carroll School of Management, Boston College, Chestnut Hill, MA USA. Her research interests include large system change; management education; cross sector collaboration; corporate responsibility; and social and organizational change.

Photo by Echo Grid on Unsplash

Making the case for and against and beyond Friedman in 2020

On the anniversary of Friedman’s “The Social Responsibility of Business Is to Increase Its Profits”

By Steen Vallentin

September 13th marked the 50th anniversary of the publication of Milton Friedman’s famous New York Time Magazine essay entitled “The Social Responsibility of Business Is to Increase Its Profits”. This has occasioned a slew of testimonials and opinion pieces on Friedman’s legacy in general and the legacy of this free market manifesto in particular. 

Not surprisingly, the tone of testimonials have differed. From those lamenting Friedman’s enormous influence on the discipline of economics, economic policy, modern business and finance over the last three to four decades in particular, to those celebrating these very same developments. One commentator, in The New York Times, speaks of how a generation of C.E.O.s have been brainwashed to believe that the only businesses of business is business. That the sole responsibility of business is to make money. 

Dwindling relevance

Anti-Friedman sentiment, and this is nothing new, takes aim at the single-mindedness and moral blind spots of free market capitalism, market fundamentalism, the shareholder paradigm, finance capitalism, you name it.

Indeed, ‘Friedman was wrong’ was for many years a recurrent theme in arguments made in support of CSR and stakeholder capitalism. But Friedman is not as relevant as he used to be.

In recent years, as far as specialized discussions of CSR go, the Friedman doctrine has increasingly been displaced by ‘the Porter doctrine’, that is, the strategic view of business responsibilities promoted by renowned, now retired, Harvard Business School professor Michael Porter along with Mark Kramer.

Porter & Kramer’s more accommodating brand of economic instrumentalism – encapsulated in the influential notion of Creating Shared Value (CSV) – has turned out to be much better attuned to present circumstances than the message of Friedman’s antagonistic and polarizing opinion piece.

The critique of free market capitalism has arguably gained urgency and currency with the climate crisis and calls for sustainable development and green transition. This is not to say that the Friedman doctrine has been abandoned by all those who used to support it.

However, given the opportunity to reflect, supporters of Friedman tend not to dwell much on the minutiae of the 1970 essay.

The devil is in the detail, and few seem to be willing to argue that what Friedman wrote 50 years ago is a proper representation of how the problem of corporate social responsibility is constituted in the year 2020.

The strength of Friedman’s wonkish essay was always its crude simplicity. For many years it seemed to encapsulate everything that needed to be said about CSR – according to mainstream economists and ideologues of a similar persuasion and the discipline of neoclassical economics. In other words, very little needed to be said. 3000 words were enough.  

However, with the rise of ESG and sustainable finance it seems to be dawning even on the disciplines of economics and finance that more indeed needs to be said – and that the crudeness of Friedman falls terribly short in capturing the challenges, risks and opportunities ahead.

Friedman’s article has served as a moral cornerstone for the shareholder value paradigm. Its moral shortcomings are increasingly showing, though.

The Friedman doctrine nonetheless

What supporters of the Friedman doctrine nevertheless argue, is that he was (and is) right about fundamentals: that the shareholder value paradigm is a superior economic principle and form of governance. The argumentative support structure for this paradigm does, however, need adjustment in order to achieve better alignment with changing historical conditions, opinion climates, societal norms and expectations.

In other words, supporters of shareholder capitalism need to fight for their cause. They need to renew their engagement in the ongoing ‘battle of ideas’ over business and society.

Their main opponent in this battle is well-known, but has been gaining new and more widespread support as of late. The opponent is stakeholder capitalism, the virtues of which have found high-level affirmation recently in the Davos Manifesto of 2020 and in the Business Roundtable statement on the purpose of business from 2019. 

Importantly, the American brands of stakeholder and shareholder capitalism have a common denominator. Both Friedman and R. Edward Freeman (the great popularizer of stakeholder thinking) have described themselves as libertarians. Stakeholder capitalism, US-style, begins and ends with voluntary initiatives and stakeholder engagement by business. Government and regulation are not supposed to have central roles to play in such endeavors. They are supposed to work better, more smoothly and efficiently without government interference. 

Thus, the first line of battle – for Friedman supporters – has to do with regulatory failure. Sure, there are market failures that we need to take account of when assessing the responsibilities of business. But regulatory failure should be no less of a concern. 

The second line of battle has to do with principles and practices of governance. According to its supporters:

Stakeholder capitalism is supposed to be more open, democratic, responsive and responsible than its counterpart. But what does stakeholder governance mean in practice, at the corporate level, unchecked by government regulation and without agreed upon rules of engagement? It is far from clear. 

Will it ultimately be good for business and society if companies are governed in accordance with the diffuse model and principles of ‘stakeholderism’? It is equally well imaginable that stakeholder capitalism can turn out to create less value for the stakeholders whose interests it is supposed to reflect and serve, and that stakeholders will ultimately be worse off if this is the direction the development of the economy takes. And it may be that shareholder capitalism, with its more clearly defined purpose and governance principles, is ultimately better equipped to keep business leaders on their toes and create value not only for shareholders but for stakeholders at large. So the argument goes in conservative circles.

Ideology and the ongoing ‘battle of ideas’ over business and society

While many of these arguments seem to fly in the face of public opinion of the more progressive kind, we must acknowledge how, in a polarized opinion climate, public opinion is divided on many political topics. Andrew Hoffman (2012) speaks of how the climate change debate in the US has become enmeshed in the so-called ‘culture wars’. Acceptance of the scientific consensus regarding climate change is now seen as an alignment with liberal views consistent with other cultural issues that divide the country (i.e., abortion, gun control, health care, and evolution). This tendency has only worsened under the Trump presidency.

On top of this we can observe how sustainable development and green transition are evolving as government-driven agendas, involving a high level of social and economic planning – not to mention the COVID-19 crisis and how the pandemic, for better or worse, has provided a large-scale affirmation of the primacy of government intervention in dealing with grand societal issues.

Under these conditions it has once again become relevant to speak not only of broader socialist tendencies in politics and society, but also of how CSR/corporate sustainability can be a Trojan horse or slippery slope leading from market capitalism into a new socialist order. In other words, the ideological underpinnings of the CSR debate are once again becoming more apparent.

This calls for more in-depth studies of the ideological commitments sustaining the theory and practice of CSR. It does not necessarily call for rejuvenation and regurgitation of Friedman’s short essay, though. Friedman is not as relevant as he used to be in discussions of CSR. The anniversary has done nothing to change this.

We need to look beyond Friedman and see him (only) as one part of the larger ideological tapestry. We need contextualized, updated engagements, not more flogging of a somewhat dead horse.

References

Hoffman, A.J. (2012). Climate science as Culture War. Ross School of Business Working Paper No. 1361, June 2012 / Stanford Social Innovation Review, 10 (4).

About the Author

Steen Vallentin is Director of the CBS Sustainability Centre and Associate Professor in the Department of Management, Society and Communication at Copenhagen Business School. His research is centred on CSR (corporate social responsibility) and sustainable development in a broad sense.