In the aftermath of recent business scandals such as Enron, Worldcom, and Parmalat the discussion about ‘Ethics in Business’, which was not exactly a hot topic during the last 20 years or so, has been inflamed anew. However, ethical corporate governance, the catch line of countless discussions in recent times, is only one but many aspects to ethics in business. This paper will focus on the aspect of corporate social responsibility rather than the issue of corporate governance. Although not as hot as corporate governance, corporate social responsibility is certainly no less important as incidents like the Exxon Valdez accident in 1989 clearly demonstrate. In fact, corporate social responsibility even covers the t opic of corporate governance since governance failures as observed at companies like Enron do not only hurt a company’s shareholders but to a large extent also most of a company’s stakeholders - which in the end often make up a considerable part of society. Milton Friedman’s (in-)famous 1970 article “The social responsibility of business is to increase its profits” will serve to represent the libertarian view which assumes great credibility to concepts like ‘Agency Theory’ and the ‘Invisible Hand’. After elucidating Friedman’s ‘classical’ liberalist approach, which in itself makes perfect sense, this paper will point towards the deficiencies of Friedman’s argument. By applying a broader understanding of how corporate social responsibility is to be derived i t becomes obvious that Friedman is telling only part of the story. This consideration will then serve as a foundation for the attempt of developing a framework of corporate social responsibility which goes beyond increasing profits only. [...]
Table of Contents
1. INTRODUCTION
2. CLARIFICATIONS ON THE TERM ‘BUSINESS’ IN THE CONTEXT OF SOCIAL RESPONSIBILITY
2.1 FRIEDMAN’S APPROACH
2.2 A MORE COMPLETE APPROACH
3. POSITIVE VS. NEGATIVE RIGHTS
3.1 THE SOCIAL CONTRACT
3.2 THE FULFILMENT OF THE SOCIAL CONTRACT
4. THE COSTS OF SOCIAL RESPONSIBILITY
5. TAXATION WITHOUT REP RESENTATION?
5.1 THE PROBLEM OF REPRESENTATION
5.2 THE PROBLEM OF TAXATION
5.3 THE EXTENT OF SOCIAL RESPONSIBILITY
6. CONCLUSION
Objectives and Themes
This position paper critically examines Milton Friedman’s argument that the social responsibility of business is to increase profits. It asks how social responsibilities might be derived from the relationship between business owners, managers and society, and whether they can be reconciled with agency theory.
- Friedman’s account of business and managerial responsibility
- Agency theory and the social contract
- Positive and negative rights in business–society relations
- The allocation of the costs of social responsibility
- Taxation, political representation and corporate conduct
- The scope of corporate social obligations
Excerpt from the Book
A more complete approach
This limited understanding of who actually can be said to have (social) responsibilities in the context of business, however, does not accurately portray the complexity of the situatio n. Dunn points out that, by following this approach Friedman himself falls into the same trap of analytical looseness because he never distinguishes between different kinds of responsibility. While it seems clear that businesses, since they do not constitute moral entities, cannot have moral obligations it does not necessarily follow that they do not have social responsibilities (Dunn, n.d., § 4). Rachels definition of the social contract as “[…] the set of rules, governing how people are to treat one another, that rational people will agree to accept, for their mutual benefit, on the condition that others follow those rules as well” (Rachels, n.d., § 4) provides useful help here. Dunn concludes that if these rules are valid throughout society in general they “place legitimate social […] responsibilities on the conduct of business by owners and managers alike” (Dunn, n.d., § 4).
As pointed out above, Friedman prematurely assumes that corporate executives are the only party who theoretically could be said to carry any kind of responsibilities in this scheme. He then explicitly rejects the idea of executives carrying social responsibilities, or any kind of responsibility other than that to the shareholders that is, by referring to the concept of Agency Theory. Now, if a company’s owners can be considered to carry social responsibilities, Dunn’s notion of executives carrying social responsibilities per se may even be relaxed - the effects on Friedman’s line of reasoning remain dramatic. Without even rejecting his employing the concept of Agency Theory, without even challenging his parsimonious understanding of shareholder interests which assumes that profits are the shareholders’ sole objective, it becomes obvious that Friedman’s argument features a major deficiency. If executives are the shareholders’ agents and are supposed to act in their employers best interests, executives should consider the owners’ social responsibilities in each and every decision they make, even if these are not explicitly articulated. Thus, executives can be said to carry indirect social responsibilities (as to their actions) derived from the responsibilities enjoined on their principals. Note that this discussion is only concerned with the executive acting as an agent and not as a principal, meaning that social responsibilities derived from his personal environment are not to be considered in this context.
Chapter Summaries
INTRODUCTION: The paper introduces corporate social responsibility and presents Friedman’s article as the starting point for a critical argument about obligations beyond profit.
CLARIFICATIONS ON THE TERM ‘BUSINESS’ IN THE CONTEXT OF SOCIAL RESPONSIBILITY: This chapter examines Friedman’s understanding of business and considers how owners’ social responsibilities might extend indirectly to their executive agents.
POSITIVE VS. NEGATIVE RIGHTS: The author uses a social-contract account and the example of relocating jobs to explore claims and obligations between businesses and society.
THE COSTS OF SOCIAL RESPONSIBILITY: This chapter considers whether the costs of socially responsible conduct should be borne by owners, customers or employees.
TAXATION WITHOUT REP RESENTATION?: The paper examines Friedman’s objection that corporate social spending amounts to taxation without representation, discusses environmental costs and considers the difficulty of defining the extent of responsibility.
CONCLUSION: The author revisits the argument for social responsibilities grounded in an implicit social contract and addresses the unresolved question of their extent.
Keywords
corporate social responsibility, Milton Friedman, business ethics, agency theory, social contract, shareholder interests, corporate executives, positive rights, negative rights, taxation, representation, environmental costs, profit
Frequently Asked Questions
What is this paper about?
It is a position paper examining Milton Friedman’s argument that the social responsibility of business is to increase its profits.
What are its central themes?
The paper discusses agency theory, the social contract, rights and obligations, the costs of corporate conduct, and the taxation and representation objections.
What is the paper’s primary objective?
It aims to assess Friedman’s argument and explore a basis for corporate social responsibility that goes beyond profit maximization.
What method does the author use?
The author develops a critical conceptual argument, engaging with Friedman’s article and other published discussions of business responsibility.
What does the main discussion cover?
It considers who can bear social responsibilities, how such duties might arise from a social contract, and how they relate to costs, taxation and political representation.
Which keywords characterize the paper?
Key terms include corporate social responsibility, agency theory, social contract, shareholder interests, taxation and environmental costs.
How does the paper use the example of relocating jobs?
It considers relocation to countries with lower labour costs or taxes in relation to the benefits a company receives from government and society.
Why does the paper discuss hazardous waste?
Hazardous-waste disposal serves as an example for examining whether corporate conduct can transfer costs to other members of society.
What question does the paper raise about the extent of social responsibility?
It asks how managers can determine the scale of obligations arising from a social contract whose terms are not specified in advance.
- Quote paper
- David Federhen (Author), 2004, "The social responsibility of business..." - A position paper on Milton Friedman, Munich, GRIN Verlag, https://www.grin.com/document/26773
