"The Social Responsibility of Business is to Increase its Profits"

[SlowToady]

By Milton Friedman, published in New York Times magazine in 1970. I came across this while doing some reading/research for an ethics paper for a class. Curious if anyone else had read it, and if so, what your thoughts on the subject are.

The Social Responsibility of Business is to Increase its Profits

[YTNUKLR]

My take on the subject, though I have not read the entire piece:

-Economics is inherently efficient. Any vacuum in the market is quickly taken up. Niches are filled, businesses consolidate and lower the ultimate cost per unit, and maximize profits. Any competition breeds a better outcome for the consumer.

Government and bureaucracies are extremely inefficient because they have no true competitive incentive to 'produce a good product/outcome' like private-sector businesses do. A lot of the tax money the US Gov't collects goes straight to paying bureaucrats, and for all the associated infrastructure-trucks, buildings, utilities, etc. Oftentimes, tax laws prevent money from efficiently reaching those in need, and/or it gets wasted heavily on the way. Billons of dollars of taxpayer money are wasted every year. Billions.

From these two data points, you'd think I was a pure Libertarian. Well, I am in another life. For the moment, I recognize that there are people on this planet that do not have as much as I do, and I feel it is the responsibility of the rich to help human society acquire more material comfort, if it is not much to the detriment of the rich to do so. For Bill Gates, $200 is nothing. But, $200 to a starving family means the world. This does not mean if I were a politician, that I would force the rich to give up money for any reason. I think that's extortion (and tyranny). However, usually these rich people seem to be conscious of their social responsibility, for which I commend them (Bill Gates, for one).

I do not have a problem with anyone having $100B (or more), or a business like ExxonMobil making $41B in profits in one year, and I do not think they should be taxed excessively (more than poorer people, but not unreasonably).

The bottom line is that I feel generally that those that are skilled/knowledgable about acquiring capital, say, like Bill Gates, Warren Buffett, the Execs of ExxonMobil and even the 23-year-old owner of Facebook, the investment managers of the Harvard University Endowment ($35B), and Google, to name a few, should continue to do what they are good at--acquiring more capital.

We all know that money begets more money, as Adam Smith said, and now more than ever that point is obvious.

Look how much money Harvard University made on their endowment last year. 17.2% on $28.9Billion! That means they made over $5 Billion last year, just managing the money effectively. I can guarantee you that unless Harvard starts having classes of 10,000 people, they are not going to be able to spend that money fast enough that they actually start eating into the principal of their investment. I think their budget is something like $500Million annually, even INCLUDING free tuition to all familes who earn less than $60,000 per year. Well, they have nothing to worry about then, because they just raked in 10x ($5,000,000,000) that amount last year in interest....and guess what, it was all tax-free!

Look where the government's at. $10 Trillion in debt. Huge, $500B deficit and growing larger. Recession on the way(?) The private sector is raking it in big, and I think that's OK, because ultimately the creativity and efficiency of the private sector is CREATING wealth whereas the government is more or less facilitating that and pushing money around.

I do foresee a point in the future where corporations have SO much money, that it will be to the severe detriment to humanity not to dole out some handouts. At this point in time, already, 98% of the money is concentrated in the top 1% of the population. That means if all those 'rich guys' just gave out 1% of their money, EVERY average-joe working American might see a DOUBLING of his annual salary. When the numbers start to show that the money could have far more utility in the hands of an average joe, than in the hands of a businessman, is when it might be right to have businesses give back.

The question, I guess you're asking, is when that might be...the answer to that I do not know.

[YTNUKLR]

Good for them. It's pretty hard to spend $5 Billion when you have it earmarked for educational (and even research) purposes! Perhaps universities in the coming years might fund some space exploration...kind of a pipe dream, but an interesting possibility, methinks.

[RoninLB]

Capitalism can't be hijacked by social ideals. That domain is best left to politics.

[Sapporo Guy]

Robin hood mentality helped the poor to be poorer.

Anyway, didn't bother to read the piece but ... I do beleive that a corporation should have integrity standards to help their employees and communities that they exist in ... all of course, within their budgetry planning. But this should be more of spreading the profit not increasing running cost (it does in a sense but I'm thinking more of the cream part) .

If a corporation isn't allowed to amass gazzillions then we all might as well turn to communism.

[Rearden]

The Economist had a survey on Corporate Social Responsibility a few weeks ago

[Moses]

A reasonable argument can be made that a noble society should provide the opportunity for all it's people to become educated and to work. The idea that any society owes it's people a living is absurd.

[Sapporo Guy]

eh?
But I thought that is the American way, currently ???

I must have missed something ... sorry ...

[sammyg2]

"Tax the rich, feed the poor, till there aint no, rich no more ...
I'd love to change the world, but I don't know what to do"

Companies are supposed to generate profit. If they generate lots of profit, they are doing their jobs well. If what they do is that profitable other companies will jump in and compete.

Exxonmobil is a good example, they generate a huge amount of profit but the percentage pf profit when compared to capitol employed is not that big when compared to other industries.

They made all the headlines recently, everyone was talking about XOM's HUGE record profit. I don't recall anyone in the media mentioning the fact that the record profit amounted to an 11.59% net profit margin.
If they did tell us that it would detract from the sensationalistic knee-jerk reactions they so desperately seek from their audience. They want people to get fired up and upset, and they selectively report the "news" to obtain that reaction. It helps their ratings. They are also supposed to be profitable, but not at the expense of deception or dishonesty.

Now, if a company ends up with excess capitol that is not needed for R&D, expansion, or re-investment, the company should use the money to buy back shares or distribute it to shareholders via dividends. They do that all the time. If the company ends up with too much money they aren't doing their jobs.

Corporate executives are not supposed to dole out handouts with the company's money, IT ISN'T THEIR MONEY TO GIVE AWAY! It belongs to the shareholders. The directors should give the money to the rightful owners (shareholders) and if they want to give it to the needy, it's their choice. I've contacted three different CEOs over the past two years, requesting that they stop giving my money away to charity. That's my responsibility, not theirs. I spoke to one CEO and one COO in person about this matter. I told him straight out that if a company's donating to charity does not increase a company's bottom line, it should never be done.

BTW, less than 2% of all exxonmobil shares are owned by individuals.
About 98% of all shares are owned by institutions:

Barclays Global Investors UK Holdings Ltd
STATE STREET CORPORATION
VANGUARD GROUP, INC. (THE)
FMR CORPORATION (FIDELITY MANAGEMENT & RESEARCH CORP)
Bank of New York Mellon Corporation
AXA
BANK OF AMERICA CORPORATION
JP MORGAN CHASE & COMPANY
NORTHERN TRUST CORPORATION
CAPITAL RESEARCH AND MANAGEMENT COMPANY
Thgese insitutions own XOM shares so they can put them in investment funds for working people with 401Ks, IRAs, and a few bucks left over after the politicians rape their paychecks.
The people who invest in these funds are who the company is owned by and who the officers and directors work for.

Here's some of the funds:
Vanguard 500 index fund
Vanguard total stock fund
SPDR trust series 1
College retirement equities fund
Vanguard institutional index fund
Washington mutual investors fund
Fidelity contrafund
Fidelity equity-income fund
Spartan US equity index fund
Select sector SPDR fund-energy select

I have investments with fidelity, Vanguard, and B of A so I indirectly own shares of XOM. Most of you probably do too.
Now, if XOM is making so darn much money, how come we're all not getting rich off it?
Because of that 11%.

[onewhippedpuppy]

Fiduciary duty pretty much sums it up. However, in recent years it's been shown that social responsibility can be used to boost profits. The stupidity of a $7 cup of coffee at Starbucks can be rationalized with the knowledge that Starbucks works to insure the working conditions of their Central American coffee farmers are up to par, and that they are paid well. So while I don't think it's a specific duty of businesses to contribute to charities/etc, the good PR can often spin into increased profits.

[SlowToady]

Friedman talks about this, actually, in the article. Basically, things like that (and charitable donations, etc) are done in self-interest, and cloaked under the guise of "Social Responsibility." However, the real motivating factor is increased profits, and the "Corporate Goodwill" is merely a positive by-product.

Sammy's got it right. When corporate executives/managers make decisions in the name of "Social Responsibility," what they are, in effect, doing is imposing taxes, and then deciding how to spend them. Then, in turn, they become not agents of the principals (company's owners), but public servants, although they remain under the employ of the company's owners. This, Friedman notes, is intolerable as public servants are elected to their positions in a democratic society, with certain "political machinery" put in place to oversee the taxation process.

If you haven't read it, you should. It's quite a bit more in-depth and complicated than the name suggests at first glance.

Originally Posted by onewhippedpuppy

Fiduciary duty pretty much sums it up. However, in recent years it's been shown that social responsibility can be used to boost profits. The stupidity of a $7 cup of coffee at Starbucks can be rationalized with the knowledge that Starbucks works to insure the working conditions of their Central American coffee farmers are up to par, and that they are paid well. So while I don't think it's a specific duty of businesses to contribute to charities/etc, the good PR can often spin into increased profits.

[Superman]

This is an important subject to me. As most of you know. Let me begin by stating that I do not lament what I am about to say. That is, I am about to make statements of brute fact that I accept. I do not begrudge 'business,' but it is important to not have mythological assumptions. Let's call it what it is.

Corporations do not have any social responsibility. At least, their only motivation toward social responsibility is, and must be, profits. If it is a good business decision to behave in a fashion that would be acceptable to the public, then fine. But here it comes.....business cannot, and cannot be expected to, have a conscience. Expecting business to have a conscience that outweighs its profit responsibility......is naive and factually incorrect.

And so.....we have these units, which are granted pseudo-citizen status (corporations are legal entities that exist apart from their owners) that can be expected to pursue profits at all costs. Technically, legally, CEO's have a feduciary responsibility to maximize the value of a share of common stock. They are legally constrained to make decisions that will do this. Maximize the value of a share of common stock. Even if those decisions are otherwise harmful to society (subject to the financial risk of becoming responsible for the cost of that harm).

And so.....this bunk about corporations being good citizens......is simply not true. They are not. We hope their actions will benefit society overall, but that is not their agenda. And indeed, their agenda can be, and often is, contrary to the public good. Regulation of business behavior is absolutely necessary. Opinions to the contrary are misguided to say the least.

One last observation. I found it interesting to learn in my last academic endeavor that stockholders and management have different risk agendas. Management would tend to be a bit more careful than stockholders require. Management's perspective is that they lose their jobs if the company goes bankrupt due to excessive risk. Stockholders prefer that excessive risk because their portfolios are diversified. It's okay for business to go bankrupt occasionally. If all businesses are pursuing the most aggressive (within limits) investments and projects, then the cost of a bankruptcy by one company will be offset by the maximization of profits by the surviving 39 other stocks in the portfolio.

[alf]

Businesses exist for one sole reason:

To Sustainably Increase Shareholder value.

That is it, everything else serves that purpose. Being socially responsible will sometimes help with the sustainable part particularly if your customers demand it.

Now as businesses are all run by Human Beings, there is no rule that says that you, as a part of that business, should not be a socially responsible, moral and honorable person. Those qualities carries into the business you are in and reflects positively on the company and thus a virtious circle continues.

[Moses]

Originally Posted by Superman

And so.....this bunk about corporations being good citizens......is simply not true. They are not.

Of course they are! They employ us, pay us, pay taxes and contribute mightily to our government that you love. What kind of economy would we have without them? We can't ALL work for the government. (At least not yet)

Corporations, like people, cannot be trusted to behave in a responsible manner. That's why we have LAWS to regulate the activity of both. If you think the corporations are hurting society your complaint lies with a regulatory agency, not just the corporation.

[Superman]

As I say, I accept the brute fact that corporations do not have a conscience. And I also accept, happily, gratefully, that they provide the economic furnace that warms us. No quarrel with that either. The quarrel is with folks who expect corporations to have a conscience that is not purely financial. Humans do. It is fascinating that humans have this knowledge of right and wrong, and feel compelled to do the "right" thing, even if it means foregoing some personal benefit. And while we recognize that humans run corporations......and here comes the important part.....they are NOT free to exercise that human conscience in their duty as corporate officers.

[Chuck Moreland]

Originally Posted by Superman

..... If it is a good business decision to behave in a fashion that would be acceptable to the public, then fine. ....

There it is.

In general it IS in the financial best interest of the company to behave in a way the is acceptable to the public. We can identify exceptions, these only serve to prove the rule.

The profit motive is an amazingly effective motivator AND regulator.

I was in my teens when I had one of those epiphany moments of sudden clarity; I understood that everyone working in their own self interest benefits society as a whole. Capitalism works.

[TechnoViking]

I work for a Japanese company. It's a really GOOD company. The executive management takes social responsibility very seriously.

[YTNUKLR]

What my long-winded answer really is trying to say is, yes, it's the social responsibility of business to increase its profits--because it's got a comparative advantage at making wealth vs. the average joe.

However, at some point, one must ask him/herself, what is all this money good for? Just acquiring more money always? We have to look to the marginal utility of any given dollar. If the dollar will go a lot farther in someone else's hands, maybe the profit-taking should be momentarily reconsidered. Look at the U.S. Government--it's currently finding that a dollar is more marginally beneficial in the hands of a consumer versus its own government spending, so it gives out tax rebates (even to people who didn't pay taxes!).

[Moses]

Originally Posted by YTNUKLR

What my long-winded answer really is trying to say is, yes, it's the social responsibility of business to increase its profits--because it's got a comparative advantage at making wealth vs. the average joe.

However, at some point, one must ask him/herself, what is all this money good for? Just acquiring more money always? We have to look to the marginal utility of any given dollar. If the dollar will go a lot farther in someone else's hands, maybe the profit-taking should be momentarily reconsidered. Look at the U.S. Government--it's currently finding that a dollar is more marginally beneficial in the hands of a consumer versus its own government spending, so it gives out tax rebates (even to people who didn't pay taxes!).

What do people (or corporations) do with all that money? The answer is that it doesn't really matter that much. If a billionaire is a miser and socks his money away in a bank, there is more money to lend. Interest rates fall and home buyers and small businesses benefit. If the billionaire prefers to buy cars and airplanes, he's directly stimulating the economy. In short, the acquisition of wealth generally benefits society in a very effective way. The portion corporations and wealthy individuals pay in federal taxes is probably much less effective.

[Racerbvd]

Wayne said it best, but the people took the risk, made the investment and worked build a business, should not be punished aND deserves the profits they earned. A fact that obomma doesn't understand that, since he has never worked a real job, or earned a pay check that didn't come from a grant or taxes.