What model holds that the only social responsibility that businesses have is to maximize profit?

The ____ model holds that the only social responsibility that businesses have is to maximize profit.

The SHAREHOLDER model holds that the only social responsibility that businesses have is to maximize profit.

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Asked 8/11/2014 2:30:43 PM

Updated 8/11/2014 6:19:00 PM

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Milton Friedman’s epochal essay, “The Social Responsibility of Business Is To Increase Its Profits,” was published in the New York Times Magazine 50 years ago this month. The piece remains as polarizing today as it was five decades ago.

For some, Friedman’s provocative theory augured a new phase in American economic life where “Greed is Good” and profits are the only real goal of business. Yet many others saw in it a timely capitalist manifesto that clearly outlined the proper role that executives should play in our free market system.

Commentators on Friedman are generally polarized between those who believe that businesses have a greater “social responsibility,” and those who feel the social mission of business is making profits, period, with other social goals best left to politics.

But both sides would probably agree that the world has become a more complex place over the last 50 years, and businesses have become ever more complicated enterprises that need to balance many different priorities.

Moreover, the rise of socially responsible approaches to business and investing has refocused the priorities of both corporate leadership and many investors, whether they truly believe in broaders social aims for business or not.

What Are the Responsibilities of Business?

Published on September 13, 1970, the Nobel Prize-winning economist argued against the so-called “social responsibilities of businesses.”

Many, in fact, believed at the time that businesses had social responsibilities. Some business leaders thought that corporations should try to help ameliorate societal ills—by providing employment to the long-term unemployed, for instance, or fighting discrimination or avoiding pollution—in addition to generating profits for their shareholders.

“Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades,” wrote Friedman.

Friedman had been influential before the publication of “The Social Responsibility of Business Is To Increase Its Profits,” but his stature only grew after the essay’s publication. He was anointed as an intellectual leader—or an ideologue, for those opposed to his ideas—whose followers in business and politics transformed the landscape of regulation and business starting in the 1980s.

Profits as the Highest Responsibility of Business

His signature achievement was the near universal acceptance—in the world of business, anyways—of the idea that a public company must maximize profits and shareholder value, above all other goals.

By this theory, corporate executives are employees, and a company’s shareholders are the boss. Shareholders, says Friedman, want to “make as much money as possible while conforming to their basic rules of the society.”

For Friedman, executives who respond to social concerns beyond making profits aren’t performing their jobs as employees. While an individual can do whatever they like with their money, an employee must always hew to the desires of their superiors.

The highest good, in Friedman’s analysis, is for an executive to return as much money as possible to shareholders. Anyone who wishes to pursue the greater good can do it on their own time with their own money. Executives who take profits and spend them on social aims have, for Friedman, effectively turned themselves into legislators.

“This is the basic reason why the doctrine of ‘social responsibility’ involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses,” wrote Friedman.

Additionally, the analysis presumes that executives are very poorly equipped when it comes to enacting social change. An investment banker is good at making deals, but how would that possibly prepare them for curbing pollution?

Friedman’s Essay Remains Controversial

In a special section of its Sunday edition this week, The New York Times revisited Friedman’s essay with commentary from economic heavyweights, most of whom argued the piece no longer held water, if it ever did.

In response to Friedman’s claim that in our economic system a corporate executive’s main concern belongs to the owners of the business, Johnson & Johnson CEO Alex Gorsky said that his company, since its founding, has prioritized “patients, doctors and nurses, mothers and fathers and others who use our products and services” and then “our customers and business partners, our employees and our communities.” Last on the list was “our shareholders.”

Marianne Bertrand, a professor at one of Friedman’s alma maters, the University of Chicago, noted that the what is good for shareholders is good for society ethos that the article represents only works when markets perform perfectly. That said, Bertrand asserts that Friedman himself wouldn’t even go so far as to say markets work perfectly.

Others commented that businesses have been complicit in long-term social problems—from discrimination to the ever-expanding gap of income inequality—even as executive pay has grown exponentially compared to that of average workers. Given this reality, executives have an obligation to fix the wrongs caused in part by their businesses, especially when they spend billions lobbying Washington for lower taxes and loosened regulations.

Friedman’s description of shareholders seemed two-dimensional to critics like Oren Cass of American Compass. Cass poses a rhetorical argument to illustrate why shareholders should care about more than simply the highest possible profits from their corporate manager “employees.”

Take a shareholder who lives in Duluth, and invests in a Duluth-based public company. The shareholder enjoys the benefits of a stronger community from having a large employer in town. Would they really want to see the company offshore operations and live in a less dynamic city just so they can earn a few more bucks?

The Social Responsibility of Business Today

It’s an interesting time to reconsider Friedman’s essay on the social responsibility of business. Corporations, it seems, have never been more concerned with appearing socially responsible.

The recent protests following George Floyd’s killing have thrown corporate social responsibility into stark relief. Executives from entities as varied as the Business Roundtable, Target and Ben & Jerry’s, and hundreds in between, promised donations to social justice organizations and causes to demonstrate their solidarity. Your Instagram feed was probably filled with companies expressing their support. Even the United Postal Service advocated for reform.

Another example is growing interest in socially responsible investing, or SRI, which attempts to incorporate the social impact of an investment, rather than solely its ability to deliver long-term returns to your portfolio.

Financial services start-up Aspiration has staked its entire business model on being a better corporate citizen. Robo-advisors Betterment and Wealthsimple emphasize their socially responsible investing options in marketing pitches.

The Rise of Socially Responsible Investing

Activist, socially responsible capitalism has gained much ground over much of the past decade. Take the en vogue acronym ESG—environmental, social and governance—an approach to business and investing that aims to encourage more socially responsible behavior in boardrooms and on investment committees.

The number of conventional funds that consider ESG factors, which include issues like carbon emissions, employee diversity and executive pay, has grown from 81 in 2018 to 564 just a year later, according to Morningstar research.

BlackRock has said it will consider a company’s response to climate change when it invests while State Street Global Advisors has told company boards that it will use its voting power to “ensure companies are identifying material ESG issues and incorporating the implications into their long-term strategy.”

Friedman was dubious of this type of shareholder activism but admitted he couldn’t denounce it. Instead he admired owners of businesses “who disdain such tactics as approaching fraud.”

But in today’s market, a corporate executive who ignores ESG factors may miss out on billions of dollars from the largest institutional investors in the world.

Still, if fraud is too harsh a description, perhaps a better term is “convenient.” It’s certainly convenient that most companies now claim to care about widely popular causes when so much money is on the line. But that doesn’t mean it’s bad for business.

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